Senseonics Holdings, Inc. (NYSE:SENS) Q2 2022 Earnings Conference Call August 9, 2022 4:30 PM ET
Company Participants
Philip Taylor – Investor Relations
Tim Goodnow – President and Chief Executive Officer
Nick Tressler – Financial Officer
Mukul Jain – Chief Operating Officer
Conference Call Participants
Sam Eiber – BTIG
Alex Nowak – Craig-Hallum Capital Group
Operator
Good day and welcome to the Senseonics Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Philip Taylor, Investor Relations. Please go ahead.
Philip Taylor
Thank you. This is Philip Taylor from the Gilmartin Group. Before we begin today, let me remind you that the company’s remarks include forward-looking statements. These statements reflect management’s expectations about future events, operating plans, regulatory matters, product enhancements, company performance and other matters and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from expressed or implied by any of these forward-looking statements is detailed under Risk Factors and elsewhere in our annual report on Form 10-K for the year ended December 31, 2021, our 10-Q for the quarter ended June 30, 2022 and other reports filed with the SEC. These documents are available in the Investor Relations of our website at www.senseonics.com. We undertake no obligation to update publicly or revise these forward-looking statements for any reason, except as required by law. Also on this call, we will be discussing our 2022 outlook.
Joining me from Senseonics are Tim Goodnow, President and Chief Executive Officer; and Nick Tressler, Financial Officer.
With that, I would like to turn the call over to Tim Goodnow, President and CEO. Tim?
Tim Goodnow
Thank you, Trip and thank you all for joining us this afternoon. On the call today, we will focus on our recent activity to support the Eversense E3 product launch in the U.S., preparations for E3 launch in our European markets and progress advancing our technology pipeline. Nick will then discuss the second quarter financials in detail and then we will open up the call for questions.
Senseonics was founded with the vision to advance highly differentiated cutting-edge technologies by providing people with diabetes, implantable sensors that extend the boundaries for sensor duration. In that spirit, we continue today designing, developing and manufacturing the most innovative, continuous glucose monitoring products in the market. Over the first half of 2022 in the United States, Senseonics and our commercial partner, Ascensia Diabetes Care, have led patients and healthcare providers through a successful transition into the next generation of long-term implantable CGM with the approval and launch of the 6-month Eversense E3.
We are confident the unique features of Eversense can compellingly address patient needs and that a 6-month sensor can offer unrivaled convenience for people with diabetes. Currently, we are focused, together with our partner on executing the launch plan to introduce more doctors and patients to E3 and on ensuring that we have the structure and support in place to successfully grow our product. We are now 4 months into a new product launch that represents a fundamental advancement in diabetes management and 1 that requires a new workflow in clinics given the implanted nature of our unique technology. While we made meaningful headway with the 90-day Eversense system, the provider and patient universe in the U.S. was only briefly exposed to our product before the beginning of the pandemic, significantly limited our ability to go into physicians’ offices and introduce providers to Eversense.
As a result, we substantially stepped back and adjusted the structure of our business. As things have normalized, we have brought new longer duration sensors onto the market and we are newly positioned with our goal remaining to deliver the greatest value to the greatest number of patients over the long-term. We believe that we are well positioned to work towards this goal through solid execution. We have a committed partner, the 6-month where E3 system globally available and the ability to be back in physicians’ offices, introduce people to Eversense.
We are excited to have initiated this process over the last 4 months of the U.S. launch but know that there is still much more work to be done, driving meaningful patient adoption. With that said, the second quarter was highly productive for Senseonics and Ascensia. Highlights include successful commercial launch of E3 in the U.S., receiving a CE Mark for E3 in Europe, the expansion of the dedicated U.S. CGM team at Ascensia, integration with distributors, including the implementation of the patient assistance program, ramping DTC advertising and progress with payer policy conversions including receipt of G codes from CMS as well as meaningful new additions in commercial payer covered buys. We are pleased with these accomplishments as we work to execute our launch plan and deliver on our expectations.
Together, we believe our collaboration with Ascensia’s positioned to drive growth and patient adoption over time. As a reminder, in our collaboration, Senseonics is responsible for R&D, clinical development, regulatory approvals, as well as manufacturing. Ascensia is responsible for sales, marketing and sales operations. We collaborate closely on driving the business forward. As we advance our launch, Senseonics priorities include focusing on operational and manufacturing efficiency to support Ascensia and distributors, while advancing our pipeline towards our implantable 1-year CGM technology.
Our partner is actively engaging the diabetes community to introduce the E3 system and increase product awareness, while ensuring patient access to the technology through positive coverage policies from health insurance providers. Together, we are excited about the opportunity to drive meaningful patient adoption and are both making investments to support our growth together.
The second quarter, which included the initiation of the U.S. launch of E3, Senseonics generated total revenue of $3.7 million, split between $1.2 million from the U.S. and $2.5 million from outside the United States. With our commercial launch in the U.S. underway, distribution logistics have been finalized. Channel partners are holding inventory and HCPs are receiving systems. We are now only shipping E3 sensors and our current commercial base has been completely transitioned to the 6-month product.
On the demand generation side, Ascensia continues to make progress in increasing patient and HCP awareness in their key regions with sales coverage. This progress is being spearheaded by their new dedicated CGM business unit and sales force in the U.S. At this point, they have built out the initial customer-facing roles, sales management, territory managers, and inside sales professionals. The new hires have been onboarded and trained and are in the field calling on current and potential Eversense prescribers. Product excitement and interest was clear at the ADA conference in June. Engagement with HCPs and diabetes educators were strong at the Ascensia Eversense booth as well as the product theater and the presentations featuring E3. We received positive feedback on the product and insertion demonstrations.
From the patient demand side by utilizing social media platforms for direct-to-consumer digital advertising campaigns, ADC is targeting the diabetes community in specific geographies tied to their sales coverage. The campaign has proven to effectively increase brand awareness and measured on a cost per lead basis is making progress. We are pleased with the lead generation and the growing funnel of potential users.
Recent insertions and leads represent a patient mix of upgrading existing Eversense users, patients transitioning from other CGMs and patients new to CGM. We view this as an encouraging early sign with our goal being to take market share and help grow the overall market. Our partner is now focused on converting these interested leads into an increasing number of users. Successful execution on this will be key for Eversense growth.
On the patient access front, payer policy transition to 6-month coverage have progressed, and we continue to expect that over the coming quarters, most payers will transition to the 6-month product coverage. And a very important development, CMS issued G-code, which became effective this past July 1, providing access to E3 for all eligible Medicare beneficiaries. With these codes in place, Ascensia is now turning their attention to working with max to ensure all eligible beneficiaries have access to our products under these codes.
In another validation of the value of Eversense, we provide to our patients the second largest health insurance provider in the U.S. is now covering E3. Anthem adds over 45 million covered lives bringing our total to approximately 250 million covered lives for E3, representing a large majority of the U.S. adult population. We are excited to see the progress in increasing the covered lives that can benefit from Eversense and look forward to working with Anthem as they implement this policy decision in their system over roughly the next quarter.
As the organizations work together to build out our launch and capabilities, we are also working to establish a series of programs targeted at making Eversense more accessible. We have identified various opportunities as we engage with HCPs and patients about our product and its workflow considerations as we learn more from introducing our product to new people and new environments. These include approaches to expand the pool of options for users to have their insertions done, such as the UC2go pilot program, as we mentioned previously as well as other potential collaborations for insertion options. UrgentCare2go or UC2go is a regional mobile urgent care business in many areas within Texas.
UC2go’s business model provides safe quality medical practice in regional medical clinics and in the home setting. UC2go provides mobile clinics, which go to the patient’s home by a convenient appointment to provide medical care and medical procedure support. Through the commercial partnership, UC2go has accomplished multiple Eversense insertions in their local clinics and importantly, has now completed their first in-home insertion. We see this as an effective, convenient and scalable approach to meet patient and physician needs for product insertions. We look forward to updating you as we have news about some of these new programs and further developments.
Now transitioning to Europe. In June, we achieved CE Mark approval for E3 with the important milestone, our most advanced CGM system will soon be available in all markets service worldwide and the same generation product will be available in all of our markets for the first time. This update, which offers patients sustained exceptional accuracy and reduced calibration requirements, enables incremental supply chain, manufacturing and operational efficiencies. Patients have been actively contacted and have begun to schedule their E3 appointments with first insertions being just completed in Germany.
The E3 system will be launched in phases across Europe over the remainder of the year, optimizing the inventory transition. Further in Germany, Ascensia continues to work on enhancing their go-to-market approach with the goal of improving uptake in this important market. In other parts of Europe, Ascensia continues to work to expand access to Eversense by focusing on winning regional tenders as they enhanced their tender preparation process. Arrangements for the launch of E3 are well underway throughout Europe as each market trains their sales force on the product features and benefits and new marketing campaigns and marketing collateral.
In our product pipeline, where our efforts are focused on the 1-year sensor, ongoing pilot studies have provided valuable information and chemistry developments that we can incorporate into our product design. Some of these results were shared at the ADA meeting in June. We are excited about the recent advancement in these pilot studies and plan to start a pivotal clinical trial at the end of the year. Furthermore, we are currently gathering additional data on our recently approved FDA configuration to support a planned iCGM filing early next year. We’re excited about the potential for the patients to be able to integrate our long life Eversense system with a wider variety of insulin delivery devices.
In addition to the advances in the sensor longevity and iCGM, we are making improvements on the digital connectivity front as well. During the quarter, we expanded data accessibility for patients to share and combine their Eversense CGM data with other data sources and third-party integrated apps by making Eversense information available through Apple Health.
This is a valuable step as the data sharing across multiple apps allows patients to combine their Eversense data with other data sources and helps patients and their providers identify correlations and gain greater insight in managing their diabetes. We believe the ability to share 6 months of CGM data on a single sensor provides significant value to patients and their providers, and we will continue to advance our digital capabilities with additional partners in the coming quarters.
I’ll now turn the call over to Nick to go over details of our second quarter financial results.
Nick Tressler
Thank you, Tim, and good afternoon, everyone. We appreciate the opportunity today to update you on our business. In the second quarter of 2022, net revenue was $3.7 million compared to $3.3 million in the prior year period. U.S. revenue for the second quarter was $1.2 million, and revenue outside the U.S. was $2.5 million. Gross profit in the second quarter of 2022 was $0.8 million an increase of $0.4 million from a gross profit of $0.4 million in the prior year period.
Research and development expenses in the second quarter of 2022 were $9.3 million, an increase of $2.2 million compared to $7.1 million in the prior year period. The increase was primarily due to investments in product development and clinical trials for next-generation technologies. Second quarter 2022 selling, general and administrative expenses were $8.6 million, a decrease of $0.6 million compared to $9.2 million in the prior year period. The decrease was primarily the result of reduced payroll expenses related to stock-based compensation.
For the 3 months ended June 30, 2022, operating loss was $17 million compared to a loss of $15.9 million in the second quarter of 2021. The decline in the company’s share price at the end of the second quarter as compared to the company’s share price at the end of the first quarter of 2022, led to significant non-cash gains in Q2. As a result, total other income increased by $285.7 million compared to the prior year period, primarily related to non-cash charges resulting from the accounting for embedded derivatives and fair value adjustments related to the company’s financings, including the 2023 and 2025 notes along with the PHC 2024 notes, and the Energy Capital equity line of credit.
As required by U.S. generally accepted accounting principles or GAAP, we mark the value of these instruments to market for each reporting period and the changes in these values are recorded as non-cash charges to the income statement. Each quarter, the value of these non-cash gains or losses will vary based on the volatility in the company’s share price. So generally, as share price increases, we incur a non-cash loss and a share price decreases, we recognize a non-cash gain.
For the 3 months ended June 30, 2022, total net income was $104.2 million or $0.22 per share compared to a net loss of $180.3 million or $0.42 loss per share in the second quarter of 2021. Net income increased by $284.5 million due to the accounting for embedded derivatives and fair value adjustments previously mentioned, partially offset by a $0.8 million increase in loss from operations. As of June 30, 2022, cash, cash equivalents and short and long-term investments totaled $150.5 million.
Turning to our outlook for 2022. We continue to expect our full year 2022 global net revenue to be in the range of $14 million to $18 million, as communicated previously. For gross margins, we are raising our expectation of full year gross margin approaching breakeven in the fourth quarter to now being positive for the fiscal year 2022, which demonstrates an important progression of our business. Our operations team in collaboration with our global commercial partner, Ascensia and our manufacturing suppliers have done an outstanding job, ensuring we are able to meet our inventory and production commitments while efficiently managing costs in the current economic environment.
For the full year 2022, we are improving projected expectations of net cash used in operations to be at the lower end of the range of $65 million to $70 million. Based on improved gross margin contribution and continued operating efficiencies. We expect the majority of expenses in 2022 to be for investment in research and development, for ongoing feasibility and pivotal clinical trials for additional products in our product pipeline including the anticipated start of the 365-day pivotal trial.
With that, I will turn it back to Tim.
Tim Goodnow
Thank you, Nick. The first half of the year was highly productive for Senseonics, the next-generation 6-month E3 system received FDA approval and the CE Mark. The U.S. commercial launch has begun with the transition of the patient base to E3 and preparations for the launch in Europe are progressing. We have realized operational efficiencies as we prepare to have the same product generation available globally for the first time. We see this as translating into further improved positive gross margins. We continue to advance Eversense patient access with CMS-issued G-codes and the positive coverage decision from Anthem providing access to eligible Medicare beneficiaries and 45 million additional commercial covered lives.
On the technology pipeline front, we continue to make progress on the development of our 1-year sensor and have expanded data accessibility for patients to share their Eversense data across apps through Apple Health. Looking forward, we remain focused on executing the E3 launch with Ascensia, driving the development of longer-duration sensors and continuously improving our manufacturing scale and margins. We believe that we are well positioned to grow our franchise and look forward to updating you on our progress as we execute our plans.
Thank you for your time today. Also joining us for questions is Mukul Jain, our Chief Operating Officer.
Operator, let’s now open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Marie Thibault with BTIG. Please go ahead.
Sam Eiber
Hey. Good afternoon everyone. This is Sam Eiber on for Marie. Appreciate you taking the questions and congrats on a nice quarter here. Maybe I can start here on some of the investments Ascensia is making. I appreciate the color on the DTC efforts and the dedicated sales team. But sitting here now with products approved in both the U.S. and Europe and growing broad-based coverage here in the U.S. is maybe now the right time to maybe accelerate some of these investments? And are you guys aligned on maybe how you are thinking about that?
Tim Goodnow
Yes. We certainly – as have agreed, right, from the very beginning that the commercial investment by Ascensia is significant, it’s important. And as you suggest, is certainly ramping. The original contract, as we have described, commits to about to $250 million over the 5-year horizon with that initiating here now with a 180-day product and obviously continuing to grow and ramp as the products get placed into the market and as we continue to do the innovation. So, we certainly do expect that we will continue to grow. As we said, we have started off with a dedicated sales force of just about, I think it’s 19 sales reps today, and that will grow significantly over the coming quarters and years. And then there is a shared sales force outside the United States that frankly, in all regions, adds up to a couple of hundred folks. So, it is a significant investment. Ascensia is committed to make that. And we do expect there to be further growth in that investment.
Sam Eiber
Great. Appreciate some of the added color there. And then maybe I can ask one more on the 365-day system. You saw some of that encouraging data at ADA earlier in June. I was wondering if the sensor design is complete at this point or are there still modifications being made to it before you submit an IDE here?
Tim Goodnow
Yes. At this point, we are continuing to make improvements. Much of this is dictated by clinical experience that we do get out of Europe. So, those clinical trials are underway, human trials. And as we gain experience with those configurations, we do anticipate making the final call here and within this quarter, frankly, so that we can be prepared to start the clinical trial at the end of the year.
Sam Eiber
Great. Thanks for taking the questions.
Tim Goodnow
Thank you.
Operator
[Operator Instructions] Our next question comes from Alex Nowak with Craig-Hallum Capital Group. Please go ahead.
Alex Nowak
Great. Good afternoon everyone and congrats on the Anthem coverage decision. Just want to confirm, did you say there was 250 million lives are now covered for the 180-day sensor? And if that’s wrong, just what is the current number and the process there to complete that transition from 90 days to 180 days with the payers?
Tim Goodnow
So, we are completing the transition, Alex, as I said. I would expect that, that will continue to happen between now and the end of the year. There are some administrative steps, a number has already occurred, as we mentioned, with CMS and their issuance of the G-codes. Anthem specifically came right out with this new coverage from them for the E3, a 180-day product and many of the others have converted over. Not all yet, but the majority, and we expect essentially everyone to be completed certainly by the end of the year.
Alex Nowak
Okay. Understood. And then maybe just an update on the inventory situation at Ascensia, just how much inventory is currently sitting out there. And I think in the 10-Q that was filed, it mentioned that Ascensia owes guidance of $4.3 million that was at the end of this quarter. Just what’s the best way to think about that number? Is that a three-month forward look of revenue, or how does it get paid down to Senseonics?
Tim Goodnow
Yes. So, on the inventory, our plan, our joint plan is to keep just about six weeks of inventory, and we have generally done a pretty good job of that. Sometimes there are markets where because of dynamics, you will have a little bit more, a little bit less. But the joint goal that we are working to and have generally been successful is that week – the six-week time period. So, Nick, I will let you speak to anything in the queue.
Nick Tressler
Yes. No, you have captured it correctly, Tim.
Alex Nowak
So, the $4.3 million is over the next six weeks then, or how is that $4.3 million recognized in the revenue?
Nick Tressler
Yes. So, the way we are recognizing revenue is that there is a recognition of revenue at the point of shipment when we ship to Ascensia. There is also additional revenue based on – because of our contract being a shared revenue arrangement, once that revenue is done by Ascensia or taken by Ascensia, then we get our portion of that. So, based on just uncertainties around timing as well as the economics, we make sure that we are clear and can recognize that revenue before it’s taken.
Alex Nowak
Okay. Understood. And then just lastly, it looked like in the 10-Q, this was with regards to a lawsuit that happened I think last year, but it looks like there was another filing against the Federal False Claims Act, just maybe details on the first complaint there that was dismissed and then a summary of what the new complaint is referring to?
Tim Goodnow
Same complaint, I think it was dismissed from what I understand. I don’t have a lot of direct details that are more than there, but that’s the same, I think with – although dismissed in the law firm’s start. I think the individual re-filed with a different law firm, so.
Alex Nowak
Okay. Understood. Thank you.
Operator
The next question comes from Jayson Bedford from Raymond James. Please go ahead.
Unidentified Analyst
Hi. This is Tom Scarvy [ph] on for Jayson. I had a quick question about the iCGM. Does that require any modifications to the existing E3 sensor and also if you guys could provide an update on what the next steps are? And any update to the timing of the filing? Is it still on pace for first half of next year, or how should we think about the timing for the iCGM?
Tim Goodnow
Yes. Simply, it is on pages. It is the same E3. Recall that the agency did give us approval on the E3 configuration with a 43-patient sample set. So, we do need to collect additional clinical data, which is actively underway right now.
Unidentified Analyst
Great. Thank you. If I could ask one more quick one about the macro conditions. Some of the other players in the diabetes have mentioned macro weighing on sales. Have you guys noticed any of that with your own patient base? Has there been any reluctance to commit to a longer duration sensor, or have you guys been mostly free of any kind of recession worries?
Tim Goodnow
Yes. I certainly wouldn’t say we have been free of it, but we have been actively managing upsides and downsides. Nick, anything else that you want to add to macro dynamics?
Nick Tressler
No. Just certainly, as we think about foreign exchange rates, the euro to the dollar as that has weakened, there is those dynamics, certainly, as we think about inflation, how that has affected the broader economy. We have been able to absorb that from the efficiency standpoint. So, there is just some of the macro dynamics. Obviously, where our revenue is at, it’s continued to grow based on the progress with Ascensia in the marketplace.
Unidentified Analyst
Great. Thank you very much.
Operator
[Operator Instructions] As we have no questions at this time, this concludes the question-and-answer session. I would like to turn the conference back over to Tim Goodnow for any closing remarks.
Tim Goodnow
Well, I would like to thank everybody for their participation and interest today. We certainly look forward to updating you in the coming quarters on future progress. So, with that, I will wish everyone a good afternoon, and thank you for your support. Good day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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