You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included in Part I, Item 1
of this Quarterly Report on Form 10-Q and with our audited consolidated
financial statements and notes thereto for the year ended December 31, 2021
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2021 filed with the U.S. Securities and Exchange Commission (SEC) on
February 28, 2022.
This report contains forward-looking statements that are based on management's
beliefs and assumptions and on information currently available to management.
All statements other than statements of historical facts included in this report
that address activities, events or developments that we expect, believe or
anticipate will or may occur in the future are forward-looking statements. In
some cases, you can identify forward-looking statements by the following words:
"may," "will," "could," "would," "should," "expect," "intend," "plan,"
"anticipate," "believe," "estimate," "predict," "project," "potential,"
"continue," "ongoing" or the negative of these terms or other comparable
terminology, although not all forward-looking statements contain these words.
These statements are based on management's current expectations, assumptions,
estimates and beliefs and involve risks, uncertainties and other factors that
may cause actual results, levels of activity, performance or achievements to be
materially different from the information expressed or implied by these
forward-looking statements. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this report, we caution you that
these statements are based on a combination of facts and factors currently known
by us and our projections of the future, about which we cannot be certain. You
should refer to the "Risk Factors" section of this report for a discussion of
important factors that may cause actual results to differ materially from those
expressed or implied by the forward-looking statements. As a result of these
factors, we cannot assure you that the forward-looking statements in this report
will prove to be accurate. Furthermore, if the forward-looking statements prove
to be inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame, or at all. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
Overview
We are an ophthalmic medical technology and pharmaceutical company focused on
developing novel therapies for the treatment of glaucoma, corneal disorders, and
retinal disease. We first developed Micro-Invasive Glaucoma Surgery (MIGS) as an
alternative to the traditional glaucoma treatment paradigm, launching our first
MIGS device commercially in 2012, and continue to develop a portfolio of
technologically distinct and leverageable platforms to support ongoing
pharmaceutical and medical device innovations. Products or product candidates
for each of these platforms are designed to advance the standard of care through
better treatment options across the areas of glaucoma, corneal disorders such as
keratoconus, dry eye and refractive vision correction, and retinal diseases such
as neovascular age-related macular degeneration (AMD), diabetic macular edema
(DME), and retinal vein occlusion (RVO).
Impact of COVID-19 Pandemic and Macroeconomic Environment
While the COVID-19 pandemic and subsequent economic slowdown materially impacted
the global demand for our products, we have seen a general return toward more
normalized levels for cataract and keratoconus procedures, with periodic
volatility in certain geographies in which we operate, through June 30, 2022.
While vaccines have become widely available in certain countries, and businesses
and economies have reopened, the status of global economic recovery remains
uncertain and unpredictable and will continue to be impacted by developments in
the pandemic including any subsequent waves of outbreak or new variant strains
of the COVID-19 virus which may require re-closures or other preventative
measures. The COVID-19 pandemic may also have long-term effects on the nature of
the office environment and remote working, which may present risks for the
Company's strategy, operations, talent recruiting and retention, and workplace
culture. Additionally, the COVID-19 pandemic has led to widespread staffing
shortages, including in ambulatory surgery centers, which has and may continue
to impact elective procedures. Further, the U.S. and global financial markets
have recently experienced volatility, which has led to disruptions to commerce
and pricing stability, impacting foreign exchange rates and causing inflation
globally. It is uncertain what the long-term impact of these economic pressures
may have on our business.
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Additionally, some of our vendors are continuing to experience supply
challenges, both in the acquisition of raw materials as well as due to labor
shortages and disruption. As a result of these supply chain challenges and due
to current inflationary pressures, we have experienced higher costs for certain
components and raw materials. We expect these supply challenges may continue for
the remainder of 2022. These challenges have led to longer lead times for, and
delays and partial or unfulfilled deliveries of certain components needed for
the manufacture of our products, in some cases requiring us to find second
sources for materials. If these delays and partial or unfulfilled deliveries
persist, they could impact our ability to ship some of our products to our
customers, or bring some of our pipeline products to market, in a timely manner.
For additional information, see the section titled Risks Related to Our
Business within Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
Financial Overview
The most important financial indicators that we use to assess our business are
net sales, gross margin, operating expenses, and cash on hand.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
Net sales $ 72,685 $ 78,093 $ 140,366 $ 146,061
Gross margin 75 % 77 % 75 % 76 %
Operating expenses $ 91,612 $ 74,556 $ 132,438 $ 137,696
June 30, December 31,
2022 2021
Cash, cash equivalents, short-term investments and
restricted cash
$ 400,318 $ 423,467
Please see Results of Operations and Liquidity and Capital Resources below for a
detailed discussion of each of the above items, including an analysis of the
fluctuations in such items year-over-year.
We incurred net losses for the three months ended June 30, 2022 and June 30,
2021 of $45.5 million and $17.5 million, respectively. We incurred net losses
for the six months ended June 30, 2022 and June 30, 2021 of $40.2 million and
$34.0 million, respectively. As of June 30, 2022, we had an accumulated deficit
of $405.4 million.
Recent Developments
iStent infinite
On August 2, 2022, we received 510(k) clearance from the U.S. Food & Drug
Administration (FDA) of the iStent infinite product, an implantable device
intended to reduce the intraocular pressure of the eye. It is indicated for use
in adult patients with primary open-angle glaucoma in whom previous medical and
surgical treatment has failed. We plan on a commercial launch of this product in
the second half of 2022.
iVeena Exclusive License Agreement
Effective June 9, 2022, we entered into an Exclusive License Agreement (iVeena
License Agreement) with iVeena Delivery Systems, Inc. (iVeena), pursuant to
which iVeena granted us an exclusive, worldwide license to manufacture and sell
products incorporating certain of iVeena's owned or controlled technologies,
including certain chemical compositions, that may be utilized for the treatment
of keratoconus. Pursuant to the terms of the License Agreement, we made a
one-time upfront payment to iVeena of $10.0 million. We accounted for the
transaction as an asset acquisition as the set of acquired assets did not
constitute a business. We may have ongoing milestone and royalty payment
obligations depending on the success of the development, approval and
commercialization of the proprietary technologies.
U.S. reimbursement rates
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In July 2022, CMS published its proposed 2023 Medicare physician fee and
facility fee payment rates (2023 Proposed Rules), which did not materially
modify the established 2022 Final Rules, including the facility fee payment
rates, in both hospital and ambulatory surgery center settings, for standalone
insertion of an aqueous drainage device, such as our iStent infinite product.
U.S. PRESERFLO® Microshunt®
On April 14, 2022, the U.S. Food & Drug Administration (FDA) completed its
review for the PRESERFLO® MicroShunt® (Preserflo Microshunt) Pre-Market Approval
submission and notified InnFocus, Inc, a Santen company of a Non-Approvable
determination. We are the exclusive licensee of the Preserflo MicroShunt in the
U.S. and we are evaluating alternate regulatory pathways for approval.
Factors Affecting Our Performance
The United States (U.S.) Centers for Medicare & Medicaid Services (CMS) final
rules for 2022 Medicare physician fee payment rates and 2022 Medicare facility
fee payment rates for services furnished in both the ambulatory surgery center
and hospital outpatient settings (Final Rules) took effect January 1, 2022.
Compared to the reimbursement rates in effect for 2021, the Final Rules
contained a significantly lower physician fee related to the implantation of
trabecular bypass stents, such as our iStent family of products, in conjunction
with cataract surgery. Conversely, the facility fee schedule related to
surgeries that include implantation of trabecular bypass stents, such as our
iStent family of products, in conjunction with cataract surgery, slightly
decreased reimbursements to an ambulatory surgery center and increased
reimbursements to a hospital. We estimate that approximately 80% of procedures
utilizing our trabecular micro-bypass technologies in the U.S. are performed in
the ambulatory surgery center setting and the remaining estimated 20% of
procedures are performed in the hospital. The reduction of the physician fee had
an impact on procedural iStent family product volumes in the first two quarters
of 2022, in conjunction with cataract surgery, which we expect will continue for
the remainder of 2022, affecting our U.S. combo-cataract Glaucoma revenues,
gross profit, and net loss, the full extent of which is not known at this time.
We expect our results of operations for the remainder of 2022 and our near-term
performance to reflect increasing competitive dynamics, the impact of the
reduced physician fee reimbursement rates contained in the CMS final rules and
the continuing disruption resulting from COVID-19 and the macroeconomic
environment, each as discussed above, the full effects of which are difficult to
predict at this time. In addition to the foregoing factors, our operations to
date have been, and we believe our future growth will be, impacted by the
following:
the rate at which we expand our global sales and marketing infrastructure, and
? the speed at which we can continue increasing awareness of our products to
patients and physicians;
? our ability to timely satisfy the requirements set by regulatory authorities
for approval of new products and approved indications for use;
future coverage and reimbursement rates set by CMS, third-party payors and
? foreign regulatory authorities for the procedures using our products, as well
as uncertainty associated therewith;
our industry is highly competitive and subject to rapid and profound
? technological, market and product-related changes. Our success depends, in
part, upon our ability to maintain a competitive position in the development of
new products for the treatment of chronic eye diseases;
publications of clinical results by us, our competitors and other third parties
? can have a significant influence on whether, and the degree to which, our
products are used by physicians and the procedures and treatments those
physicians choose to administer to their patients;
the physicians who use our products may not perform procedures during certain
? times of the year, due to seasonality patterns typical for certain of our
procedures, or when they are away from their practices for various reasons;
our ability to realize commercialized products from the licensing and
? distribution arrangements and other partnerships into which we have entered and
will in the future enter; and
the impact of fluctuations in foreign currency exchange rates, as most of our
? sales internationally are denominated in the local currency of the country in
which we sell our products.
Further, we have made and expect to continue to make significant investments in
our global sales force, marketing programs, research and development (R&D)
activities, clinical studies, and general and administrative infrastructure.
FDA-approved investigational device exemption (IDE) or investigational new drug
(IND) studies and
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new product development programs in our industry are expensive. Our operating
expenses have increased significantly following our acquisition of Avedro, and
we have also incurred additional construction costs related to our new facility
in Aliso Viejo, California (Aliso Facility), as well as expansions of our
existing facilities in San Clemente, California and Burlington, Massachusetts.
Although we have been profitable for certain periods in our operating history,
there can be no assurance that we will be profitable or generate cash from
operations in the future.
Components of Results of Operations
Net Sales
We currently operate in one reportable segment and net sales are generated
primarily from sales of iStent products and sales of Photrexa and other
associated drug formulations, as well as our proprietary bioactivation systems,
to customers, and royalty income. Revenue is recognized when control of the
promised goods or services is transferred to the customer in an amount that
reflects the consideration to which we expect to be entitled in exchange for
those products or services.
We sell the majority of our products through a direct sales organization in the
United States. Internationally, we sell our products primarily through direct
sales subsidiaries in seventeen countries and through independent distributors
in certain countries in which we do not have a direct presence or maintain a
modest commercial presence. The primary end-user customers for our products are
surgery centers, hospitals and physician private practices.
While net sales may increase as we expand our global sales and marketing
infrastructure and continue to increase awareness of our products by expanding
our sales base and increasing our marketing efforts, historically our net sales
within a fiscal year have been impacted seasonally, as demand for U.S.
ophthalmic procedures is typically softer in the first quarter and stronger in
the fourth quarter of a given year. However, we did not experience the same
seasonality pattern in 2021 due in part to the COVID-19 pandemic and its effect
on our commercial performance may continue into future reporting periods. We
also believe the 2022 CMS physician fee and facility fee rate decreases, which
were finalized in the fourth quarter of 2021, have disrupted traditional
customer ordering patterns and have resulted in our customers' trialing of
competitive products, causing reduced U.S. Glaucoma sales volumes during the
first two quarters of 2022. Additionally, unfavorable foreign exchange rates and
global COVID dynamics in certain geographies in which we operate have negatively
impacted our sales during the six months ended June 30, 2022. Also, for several
years we had commercialized our products in the U.S. with few or no direct
competitors. Other products have now become available in the U.S. and globally,
or are in development by third parties, that have entered or could enter the
market and which may affect adoption of or demand for our products. These other
products could achieve greater commercial acceptance or demonstrate better
safety or effectiveness, clinical results, ease of use or lower costs than our
products, which could adversely impact our net sales.
Cost of Sales
Cost of sales reflects the aggregate costs to manufacture our products and
includes raw material costs, labor costs, manufacturing overhead expenses and
the effect of changes in the balance of reserves for excess and obsolete
inventory.
We manufacture our iStent products at our facility in San Clemente, California
using components manufactured by third parties. We manufacture our KXL systems
at our manufacturing facilities in Burlington, Massachusetts and we contract
with third-party manufacturers in the U.S. and Germany to produce our Photrexa
and other associated drug formulations. We currently intend to maintain our
manufacturing facilities at our San Clemente and Burlington locations for the
foreseeable future.
Due to the relatively low production volumes of our iStent products and our KXL
systems compared to our potential capacity for those products, a significant
portion of our per unit costs is comprised of manufacturing overhead expenses.
These expenses include quality assurance, material procurement, inventory
control, facilities, equipment and operations supervision and management.
Cost of sales includes a charge equal to a low single-digit percentage of
worldwide net sales of certain current and future products, including our iStent
products, with a required minimum annual payment of $0.5 million, which amount
became payable to the Regents of the University of California (the University)
in connection with our December 2014 agreement with the University related to a
group of our U.S. patents (the Patent Rights). This ongoing product
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payment obligation will change as patent coverage on certain products begin to
lapse and will terminate entirely on the date the last of the Patent Rights
expires, which is currently expected to be in the fourth quarter of 2022.
Cost of sales has included amortization of the $252.2 million developed
technology intangible assets. For each of the three and six months ended June
30, 2022 and June 30, 2021, the amortization expense was $5.5 million and $11.0
million, respectively.
Our future gross profit as a percentage of net sales, or gross margin, will be
impacted by numerous factors including commencement of sales of products in our
pipeline, or any other future products, which may have higher product costs. Our
gross margin will also be affected by manufacturing or supply chain
inefficiencies that we may experience as we attempt to manufacture our products
on a larger scale, manufacture new products and change our manufacturing
capacity or output. Additionally, our gross margin will continue to be affected
by royalty expenses on current or future products associated with various
licensing agreements. Our gross margin in future periods may also be impacted by
other factors adversely affecting our net sales in future periods, including the
impact of the COVID-19 pandemic and any related supply chain issues, the current
macroeconomic environment, including inflationary pressures and the resulting
increase in costs, and the impact of the reductions on payment rates for certain
of our products and related services as a result of the CMS Final Rules.
Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses primarily consist of
personnel-related expenses, including salaries, sales commissions, bonuses,
fringe benefits and stock-based compensation for our executive, financial,
marketing, sales, and administrative functions. Other significant SG&A expenses
include marketing programs; advertising; post-approval clinical studies;
conferences and congresses; travel expenses; costs associated with obtaining and
maintaining our patent portfolio; professional fees for accounting, auditing,
consulting and legal services; costs associated with our global enterprise
systems; and allocated facility expenses.
We expect SG&A expenses to continue to grow as we increase our global sales and
marketing infrastructure and general administration infrastructure. We also
expect other nonemployee-related costs, including sales and marketing program
activities for new products, outside services and accounting and general legal
costs to increase as our overall operations grow. The timing of these increased
expenditures and their magnitude are primarily dependent on the commercial
success and sales growth of our products, as well as on the timing of any new
product launches and other potential business and operational activities.
Research and Development
Our R&D activities primarily consist of new product development projects,
pre-clinical studies, IDE and IND studies, and other clinical trials. Our R&D
expenses primarily consist of personnel-related expenses, including salaries,
fringe benefits and stock-based compensation for our R&D employees; research
materials; supplies and services; in-licenses, including event-based milestones;
and the costs of conducting clinical studies, which include payments to
investigational sites and investigators, clinical research organizations,
consultants, and other outside technical services and the costs of materials,
supplies and travel. We expense R&D costs as incurred. We expect our R&D
expenses to continue to increase as we initiate and advance our development
programs, including our expanding surgical, pharmaceutical and intraocular
sensor development efforts and clinical trials across glaucoma, retinal disease
and corneal health.
Completion dates and costs for our clinical development programs include seeking
regulatory approvals and our research programs vary significantly for each
current and future product candidate and are difficult to predict. As a result,
while we expect our R&D costs to continue to increase for the foreseeable
future, we cannot estimate with any degree of certainty the costs we will incur
in connection with the development of our product candidates. We anticipate we
will make determinations as to which programs and product candidates to pursue
and how much funding to direct to each program and product candidate on an
ongoing basis in response to the scientific success of early research programs,
results of ongoing and future clinical trials, as well as ongoing assessments as
to each current or future product candidate's commercial potential and our
likelihood of obtaining necessary regulatory approvals. We are not currently
able to fully track expenses by product candidate.
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In-process Research and Development
Our in-process research and development (IPR&D) expenses relate to our exclusive
licensing agreement with iVeena and the amendment of our exclusive licensing
agreement with Intratus, Inc. Upfront payments of $10.0 million and $5.0 million
were made in connection with each of these agreements, respectively, and were
expensed to IPR&D as management determined there were no alternative future uses
for the technology acquired.
Litigation-related Settlement
Pursuant to the terms of a settlement agreement dated September 14, 2021,
Ivantis, Inc. paid us $30.0 million in the quarter ended March 31, 2022. The
$30.0 million cash payment received during the quarter ended March 31, 2022 is
included in litigation-related settlement as a reduction of operating expenses
on the condensed consolidated statements of operations for the six months ended
June 30, 2022.
Non-Operating Expense, Net
Non-operating expense, net primarily consists of interest expense associated
with our finance lease for our Aliso Facility and for our 2.75% convertible
notes due 2027 (Convertible Notes), interest income derived from our short-term
investments, and unrealized gains and losses arising from exchange rate
fluctuations on transactions denominated in a currency other than the U.S.
dollar, primarily related to intercompany loans.
Income Taxes
Our tax provision is comprised of state and foreign income taxes. Our net
deferred tax liability of $7.3 million at June 30, 2022 represents the excess of
our indefinite-lived deferred tax liabilities over our indefinite-lived deferred
tax assets. We continue to provide a full valuation allowance against our other
net deferred tax assets.
We record reserves for uncertain tax positions where we believe the ability to
sustain the tax position does not reach the more likely than not threshold.
Results of Operations
Comparison of Three Months Ended June 30, 2022 and June 30, 2021 (in thousands):
Three Months Ended
June 30, % Increase
(dollars in thousands) 2022 2021 (decrease)
Statements of operations data:
Net sales $ 72,685 $ 78,093 (7) %
Cost of sales 17,833 17,759 - %
Gross profit 54,852 60,334 (9) %
Operating expenses:
Selling, general and administrative 49,900 45,300 10 %
Research and development 31,712 24,256 31 %
In-process research and development 10,000 5,000 100 %
Total operating expenses 91,612 74,556 23 %
Loss from operations (36,760) (14,222) 158 %
Total non-operating expense, net (8,881) (3,052) 191 %
Income tax (benefit) provision (105) 208 NM
Net loss $ (45,536) $ (17,482) 160 %
NM = Not Meaningful
Net Sales
Net sales for the three months ended June 30, 2022 and June 30, 2021 were $72.7
million and $78.1 million, respectively.
Net sales of glaucoma products in the United States were $38.2 million and $46.3
million for the three months ended June 30, 2022 and June 30, 2021,
respectively, decreasing by 18% . This decrease is primarily due to lower
volumes caused by the reduced CMS physician fee that was implemented on January
1, 2022, which has disrupted
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traditional customer ordering patterns and has resulted in our customers'
trialing of competitive products. Additionally, sales in the second quarter 2021
were positively impacted by abnormally high demand for cataract and glaucoma
procedures following the rollout of the COVID-19 vaccines and increasing
normalized economic and operating conditions within certain markets in which we
operated at that time.
International sales of glaucoma products for the three months ended June 30,
2022 and June 30, 2021 were $17.9 million and $16.4 million, respectively,
increasing by 9%. The increase in international sales reflects broad-based
growing demand in many key international markets for combined cataract and
glaucoma procedures during the quarter ended June 30, 2022 as compared to the
quarter ended June 30, 2021, partially offset by unfavorable foreign exchange
rates.
Net sales of corneal health products were $16.6 million and $15.4 million for
the quarter ended June 30, 2022 and June 30, 2021, respectively, increasing by
8%.
Of the $1.2 million increase in net sales generated by our corneal health
products, $0.8 million related to U.S. sales using direct sales operations,
which was comprised of an increase of $0.9 million of Photrexa net sales
partially offset by reductions of $0.1 million in U.S. capital equipment sales.
Additionally, U.S. corneal health sales for the quarter ended June 30, 2022 were
positively impacted by higher realized average sales prices of Photrexa. Our
international corneal health sales increased $0.4 million, in locations where we
utilize distributors given we do not have a direct commercial presence, due to
increased demand in the second quarter 2022 in certain geographies in which we
operate.
Cost of Sales
Cost of sales for each of the three months ended June 30, 2022 and June 30, 2021
were $17.8 million. Our gross margin was 75% for the three months ended June 30,
2022 and 77% for the three months ended June 30, 2021. This slight variance from
the prior year period resulted primarily from an increase in the product mix of
modestly lower margin products of international market sales.
Selling, General and Administrative Expenses
SG&A expenses for the three months ended June 30, 2022 and June 30, 2021 were
$49.9 million and $45.3 million, respectively, reflecting an increase of
approximately $4.6 million or 10%.
We incurred approximately $31.9 million of costs associated with commercial
personnel and discretionary spending during the three months ended June 30, 2022
as compared to $27.8 million during the three months ended June 30, 2021, with
the increase primarily due to compensation and related employee expenses
associated with our sales infrastructure in glaucoma and corneal health, along
with increased travel, meetings and accompanying costs as business activities
have reopened and expanded over the course of the last twelve months. We also
incurred approximately $18.0 million of costs associated with general and
administrative personnel and discretionary spending during the three months
ended June 30, 2022 as compared to $17.5 million during the three months ended
June 30, 2021, associated with our ongoing administrative functions and
amortization of our right-of-use asset related to our long-term lease for the
Aliso Facility.
Research and Development Expenses
R&D expenses for the three months ended June 30, 2022 and June 30, 2021 were
$31.7 million and $24.3 million, respectively, reflecting an increase of $7.5
million or 31%. The increase in R&D expenses relates to compensation and related
employee expenses associated with our growing R&D organization and increased
facilities allocation costs to R&D given our new facility in Aliso Viejo.
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During the three months ended June 30, 2022, we incurred $20.1 million in core
R&D expenses and $11.6 million in clinical expenses, comprised of $16.2 million
in compensation and related employee expenses with the remaining $15.5 million
spent on the continued research and development, clinical studies, regulatory
activities, quality assurance, clinical inventory and supplies for surgical
glaucoma product candidates and pharmaceutical projects, such as a
pharmaceutical therapeutic system for the treatment of keratoconus without the
removal of the epithelium (often referred to as "epi-on"), iDose and our earlier
stage programs for dry eye, presbyopia, retina and other therapeutic
investments. For the three months ended June 30, 2021, we incurred $16.0 million
in core R&D expenses and $8.3 million in clinical expenses, comprised of $12.3
million in compensation and related employee expenses with the remaining $12.0
million spent on the abovementioned programs.
In-process Research and Development Expenses
IPR&D expenses for the three months ended June 30, 2022 related to the upfront
payment of $10.0 million related to the exclusive licensing agreement with
iVeena. IPR&D expenses for the three months ended June 30, 2021 related to the
upfront payment of $5.0 million related to the amendment of our exclusive
licensing agreement with Intratus, Inc.
Non-Operating Expense, Net
We had non-operating expense, net of $8.9 million and $3.1 million for the three
months ended June 30, 2022 and June 30, 2021, respectively. The $5.8 million
increase primarily relates to recognition of unrealized foreign currency losses
due to higher intercompany loan balances denominated in, and impacted by,
unfavorable changes in foreign currency exchange rates. Non-operating expense,
net also includes interest expense recognized related to the Convertible Notes
and to the finance lease for our Aliso Facility.
Income Tax Provision
Our effective tax rate for the second quarter of 2022 was 0.23%. For the three
months ended June 30, 2022 and June 30, 2021, we recorded a (benefit)/provision
for income taxes of $(0.1) million and $0.2 million, respectively, which were
primarily comprised of current state and foreign income tax expense and deferred
federal and state income tax benefits for the second quarter of 2022, and state
and foreign income taxes for the second quarter of 2021.
Comparison of Six Months Ended June 30, 2022 and June 30, 2021 (in thousands):
Six Months Ended
June 30, % Increase
(dollars in thousands) 2022 2021 (decrease)
Statements of operations data:
Net sales $ 140,366 $ 146,061 (4) %
Cost of sales 34,896 34,392 1 %
Gross profit 105,470 111,669 (6) %
Operating expenses:
Selling, general and administrative 93,849 87,221 8 %
Research and development 58,589 45,475 29 %
In-process research and development 10,000 5,000 100 %
Litigation-related settlement (30,000) - NM
Total operating expenses 132,438 137,696 (4) %
Loss from operations (26,968) (26,027) 4 %
Total non-operating expense, net (12,970) (7,437) 74 %
Income tax provision 221 487 (55) %
Net loss $ (40,159) $ (33,951) 18 %
Net Sales
Net sales for the six months ended June 30, 2022 and June 30, 2021 were $140.4
million and $146.1 million, respectively.
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Net sales of glaucoma products in the United States were $72.1 million and $86.2
million for the six months ended June 30, 2022 and June 30, 2021, respectively,
decreasing by 16%. This decrease is primarily due to lower volumes caused by the
reduced CMS physician fee that was implemented on January 1, 2022, which has
disrupted traditional customer ordering patterns and has resulted in our
customers' trialing of competitive products. Additionally, sales in the second
quarter 2021 were positively impacted by abnormally high demand for cataract and
glaucoma procedures following the rollout of the COVID-19 vaccines and
increasing normalized economic and operating conditions within certain markets
in which we operated at that time.
International sales of glaucoma products for the six months ended June 30, 2022
and June 30, 2021 were $35.5 million and $30.2 million, respectively, increasing
by 18%. The increase in international sales reflects growing demand in many key
international markets for combined cataract and glaucoma procedures during the
six months ended June 30, 2022 as compared to the six months ended June 30,
2021, partially offset by unfavorable foreign exchange rates.
Net sales of corneal health products were $32.8 million and $29.6 million for
the quarter ended June 30, 2022 and June 30, 2021, respectively, increasing by
11%.
Of the $3.1 million increase in net sales generated by our corneal health
products, $2.4 million related to U.S. sales using direct sales operations,
which was comprised of an increase of $2.6 million of Photrexa net sales offset
by reductions of $0.2 million in U.S. capital equipment sales. Additionally,
U.S. corneal health sales for the six months ended June 30, 2022 were positively
impacted by higher realized average sales prices of Photrexa. Our international
corneal health sales increased $0.7 million, in locations where we utilize
distributors given we do not have a direct commercial presence, due to increased
demand in the six months ended June 30, 2022 in certain geographies in which we
operate.
Cost of Sales
Cost of sales for the six months ended June 30, 2022 and June 30, 2021 were
$34.9 million and $34.3 million, respectively, reflecting an increase of $0.5
million. Our gross margin was 75% for the six months ended June 30, 2022 and 76%
for the six months ended June 30, 2021. This slight variance from the prior year
period resulted primarily from an increase in the product mix of modestly lower
margin products of international market sales.
Selling, General and Administrative Expenses
SG&A expenses for the six months ended June 30, 2022 and June 30, 2021 were
$93.8 million and $87.2 million, respectively, reflecting an increase of
approximately $6.6 million or 8%.
We incurred approximately $62.2 million of costs associated with commercial
personnel and discretionary spending during the six months ended June 30, 2022
as compared to $54.5 million during the six months ended June 30, 2021, with the
increase primarily due to compensation and related employee expenses associated
with our sales infrastructure in glaucoma and corneal health, along with
increased travel, meetings and accompanying costs as business activities have
reopened and expanded over the course of the last twelve months. We also
incurred approximately $31.6 million of costs associated with general and
administrative personnel and discretionary spending during the six months ended
June 30, 2022 as compared to $32.7 million during the six months ended June 30,
2021, associated with our ongoing administrative functions and amortization of
our right-of-use asset related to our long-term lease for the Aliso Facility.
Research and Development Expenses
R&D expenses for the six months ended June 30, 2022 and June 30, 2021 were $58.6
million and $45.5 million, respectively, reflecting an increase of $13.1 million
or 29%.
During the six months ended June 30, 2022, we incurred $36.5 million in core R&D
expenses and $22.1 million in clinical expenses, comprised of $30.3 million in
compensation and related employee expenses with the remaining $28.3 million
spent on the continued research and development, clinical studies, regulatory
activities, quality assurance, clinical inventory and supplies for surgical
glaucoma product candidates and pharmaceutical projects, such as a
pharmaceutical therapeutic system for the treatment of keratoconus without the
removal of the epithelium (often referred to as "epi-on"), iDose and our earlier
stage programs for dry eye, presbyopia, retina and other therapeutic
investments. For the six months ended June 30, 2021, we incurred $29.8 million
in core R&D expenses and $15.7 million in clinical
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expenses, comprised of $23.8 million in compensation and related employee
expenses with the remaining $21.7 million spent on the abovementioned programs.
The increase in R&D expenses relates to compensation and related employee
expenses related to our growing R&D organization and increased facilities
allocation costs to R&D given our new facility in Aliso Viejo.
In-process Research and Development Expenses
IPR&D expenses for the six months ended June 30, 2022 were payment of the
upfront fee of $10.0 million related to the exclusive licensing agreement with
iVeena. IPR&D expenses for the six months ended June 30, 2021 were payment of
the upfront fee of $5.0 million related to the amendment of our exclusive
licensing agreement with Intratus, Inc.
Litigation-related Settlement
The $30.0 million cash payment from the Settlement Agreement received during the
six months ended June 30, 2022 is included in litigation-related settlement as a
reduction of operating expenses on the condensed consolidated statements of
operations.
Non-Operating Expense, Net
We had non-operating expense, net of $13.0 million and $7.4 million for the six
months ended June 30, 2022 and June 30, 2021, respectively. The $5.6 million
increase primarily relates to recognition of unrealized foreign currency losses
due to higher intercompany loan balances denominated in, and impacted by,
unfavorable changes in foreign currency exchange rates. Non-operating expense,
net also includes interest expense recognized related to the Convertible Notes
and to the finance lease for our Aliso Facility
Income Tax Provision
Our effective tax rate for the six months ended June 30, 2022 was (0.55)%. For
the six months ended June 30, 2022 and June 30, 2021, we recorded a provision
for income taxes of $0.2 million and $0.5 million, respectively, which were
primarily comprised of current state and foreign income tax expense and deferred
federal and state income tax benefits for the first and second quarter of 2022,
and state and foreign income taxes for the first and second quarter of 2021.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and
short-term investments, and cash generated from operating, financing and
investing activities. Our primary uses of cash have been for selling and
marketing activities, research and development programs, and capital
expenditures.
The following table summarizes our cash and cash equivalents, short-term
investments and selected working capital data as of June 30, 2022 and December
31, 2021 (in thousands):
June 30, December 31,
2022 2021
Cash and cash equivalents $ 102,553 $ 100,708
Short-term investments 288,637 313,343
Accounts receivable, net 36,032 33,438
Inventory 27,842 23,011
Accounts payable 21,294 7,333
Accrued liabilities 48,214 56,027
Working capital (1) 401,589 422,766
(1) Working capital consists of total current assets less total current
liabilities.
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Main Sources of Liquidity
We plan to fund our operations, commitments for capital expenditures and other
short and long-term known contractual and other obligations using existing cash
and investments and, to the extent available, cash generated from commercial
operations. Our existing cash and investments include the remaining net proceeds
from the Convertible Notes issued in June 2020 (after payment for the related
capped call transactions), and the two $30.0 million payments by Ivantis during
the quarters ended March 31, 2022 and September 30, 2021, which are being used
for working capital and general corporate purposes.
Cash, Cash Equivalents, Short-term Investments and Restricted Cash
Our cash, cash equivalents and short-term investments totaled approximately
$391.2 million and our restricted cash totaled approximately $9.1 million as of
June 30, 2022.
Senior Convertible Notes
Our Convertible Notes may be converted at the option of the holders at the times
and under the circumstances and at the conversion rate described in Note 9.
Convertible Senior Notes of the notes to our condensed consolidated financial
statements. As of June 30, 2022, none of the conditions allowing holders of the
Convertible Notes to convert had been met. These conditions are measured each
quarter. For example, if our trading price remains above 130% of the conversion
price for at least 20 trading days during the 30 consecutive trading-day period
ending on, and including, June 30, 2022, holders of the Convertible Notes would
have the right to convert their Convertible Notes during the calendar quarter
beginning July 1, 2022. Upon conversion, we will pay or deliver, as the case may
be, cash, shares of our common stock or a combination of cash and shares of our
common stock, at our election, in the manner and subject to the terms and
conditions provided in the Indenture. Settling all or a portion of the
conversion obligation in cash could adversely affect our liquidity. In addition,
even if holders of the Convertible Notes do not elect to convert their
Convertible Notes, we could be required under applicable accounting rules to
reclassify all or a portion of the outstanding principal of the Convertible
Notes as a current rather than long-term liability, which would result in a
material reduction of our net working capital.
We may seek to obtain additional financing in the future through other debt or
equity financings. There can be no assurance that we will be able to obtain
additional financing on terms acceptable to us, or at all and although we have
been profitable for certain periods in our operating history, there can be no
assurance that we will be profitable or generate cash from operations.
Short-term Liquidity Requirements
Our short-term liquidity requirements primarily consist of regular operating
costs, interest payments related to our senior convertible notes, funding R&D
projects, capital expenditures as we continue the development of our facilities
and office spaces, operating and financing lease obligations and other firm
purchase commitments. As of June 30, 2022, we had net working capital of $401.6
million, which indicates that our current assets are more than enough to cover
our short-term liabilities.
Long-term Liquidity Requirements
Our long-term liquidity requirements primarily consist of interest and principal
payments related to our Convertible Notes, capital expenditures for the
development of our manufacturing facilities and office spaces, and long-term
material cash requirements as described below. As demand grows for our products,
we will continue to expand global operations to meet demand through investments
in our manufacturing capabilities.
Cash Flows
Our historical cash outflows have primarily been associated with cash used for
operating activities such as the expansion of our sales, marketing and R&D
activities; purchase of and growth in inventory and other working capital needs;
the acquisition of intellectual property; and expenditures related to equipment
and improvements used to increase our manufacturing capacity and improve our
manufacturing efficiency and for overall facility expansion.
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The following table is a condensed summary of our cash flows for the periods
indicated:
Six Months Ended
June 30,
(in thousands) 2022 2021
Net cash (used in) provided by:
Operating activities $ (2,432) $ 11,569
Investing activities 3,733 (23,297)
Financing activities 1,516 33,776
Exchange rate changes (1,260) (498)
Net increase in cash, cash equivalents and restricted cash $ 1,557 $ 21,550
At June 30, 2022, our cash and cash equivalents were held for working capital
purposes. We do not enter into investments for trading or speculative purposes.
Our policy is to invest any cash in excess of our immediate requirements in
investments designed to preserve the principal balance and provide liquidity.
Operating Activities
In the six months ended June 30, 2022, our operating activities used $2.4
million in net cash and in the six months ended June 30, 2021 our operating
activities provided $11.6 million of net cash.
For the six months ended June 30, 2022, our net cash used in operating
activities reflected our net loss of $40.2 million, adjusted for non-cash items
of $38.6 million, primarily consisting of stock-based compensation expense of
$17.5 million, depreciation of $3.0 million, amortization of intangible assets
of $12.5 million, and amortization of lease right-of-use assets of $2.3 million.
Additionally, changes in operating assets and liabilities were $0.8 million,
which resulted primarily from increases in accounts receivable of $3.3 million,
an increase in inventory of $5.2 million, and an increase in prepaid expenses
and other current assets of $0.6 million, as well as an increase in other assets
of $0.2 million, partially offset by increases in accounts payable and accrued
liabilities of $8.4 million.
For the six months ended June 30, 2021, our net cash provided by operating
activities reflected our net loss of $34.0 million, adjusted for non-cash items
of $37.3 million, primarily consisting of stock-based compensation expense of
$16.7 million, depreciation of $2.3 million, amortization of intangible assets
of $12.5 million, and amortization of lease right-of-use assets of $2.3 million.
Additionally, changes in operating assets and liabilities were $8.2 million,
which resulted primarily from increases in accounts payable and accrued
liabilities of $15.3 million, offset by increases in accounts receivable of $1.7
million and inventory of $1.9 million, and an increase in prepaid expenses and
other current assets of $3.8 million.
Investing Activities
In the six months ended June 30, 2022 our investing activities provided $3.7
million of net cash and for the six months ended and June 30, 2021, our
investing activities used $23.3 million of net cash.
For the six months ended June 30, 2022, we used cash of approximately $36.9
million for purchases of short-term investments, approximately $16.0 million for
purchases of property and equipment, primarily related to our Aliso Facility,
and we received cash of approximately $56.7 million from sales and maturities of
short-term investments.
For the six months ended June 30, 2021, we used cash of approximately $97.2
million for purchases of short-term investments, approximately $28.5 million for
purchases of property and equipment, primarily related to our Aliso Facility,
and approximately $1.2 million related to investments in company-owned life
insurance, and we received cash of approximately $103.7 million from sales and
maturities of short-term investments.
We expect to continue our increased levels of capital expenditures over the
remainder of the year as we continue expansion of our manufacturing capacity for
current and new products, improve our manufacturing efficiency and for overall
facility expansion.
Financing Activities
In the six months ended June 30, 2022 and June 30, 2021, our financing
activities provided $1.5 million and $33.8 million of net cash, respectively.
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For the six months ended June 30, 2022, we received $3.7 million from the
exercises of stock options and purchases of our common stock by employees
pursuant to our Employee Stock Purchase Plan and used $2.0 million for payment
of employee taxes related to restricted stock unit vesting.
For the six months ended June 30, 2021, we received $24.4 million from the
exercises of stock options and purchases of our common stock by employees
pursuant to our Employee Stock Purchase Plan and used $2.8 million for payment
of employee taxes related to restricted stock unit vesting. Additionally, we
received $12.7 million in proceeds from our tenant improvement allowances for
our Aliso Facility and paid $0.5 million in principal on our finance lease.
Material Cash Requirements
There have been no material changes to our material cash requirements as of June
30, 2022 from those disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2021 filed with the SEC on February 28, 2022.
Critical accounting policies and significant estimates
Management's discussion and analysis of our financial condition and results of
operations are based on our condensed consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP). The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and related disclosure of contingent assets
and liabilities, revenue and expenses at the date of the condensed consolidated
financial statements. Generally, we base our estimates on historical experience
and on various other assumptions in accordance with GAAP that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions and such differences
could be material to our financial position and results of operations.
Our critical accounting policies and significant estimates that involve a higher
degree of judgment and complexity are described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Critical
Accounting Policies and Significant Estimates" included in Part II, Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2021, filed with
the SEC on February 28, 2022. There have been no material changes to our
critical accounting policies and estimates as disclosed therein, during the six
months ended June 30, 2022, as compared with those disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on
February 28, 2022.
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