Welcome to Glaukos Corporation's Third Quarter 2015 Financial Results Conference Call. A copy of the company's press release issued after the market closed today is available at www.glaukos.com. [Operator Instructions] This call is being recorded and an archived replay will be available online in the Investors section at www.glaukos.com. I will now turn the call over to Sheree Aronson, Vice President of Investor Relations.

Good afternoon. Joining me today are President and CEO, Tom Burns; Chief Financial Officer, Rich Harrison, and Chief Commercial Officer, Chris Calcaterra. Following prepared remarks by Tom and Rich, all 3 gentlemen will take your questions. Before we begin, let me remind you that all statements, other than statements of historical facts made on this call that address activities, events or developments we expect, believe or anticipate will or may occur in the future, are forward-looking statements. These include statements about our plans, objectives, strategies and prospects, regarding among other things, our iStent products, our pipeline technology, our U.S. and international commercialization efforts, the efficacy of our current and future products, and our competitive market position, financial condition and results of operations. These statements are based on current expectations about future events affecting us and are subject to risks, uncertainties and factors relating to our operations and business environment. All of which are difficult to predict and many of which are beyond our control. Therefore, they may cause our actual results to differ materially from those expressed or implied by forward-looking statements. Review today's press release and our recent SEC filings for more information about these risks. You'll find these documents in the Investors section of our website at www.glaukos.com. With that, I'll turn the call over to President and CEO, Tom Burns. Tom?

Thank you, Sheree, and good afternoon, everyone, who took the time to join us on the call today. I'm pleased to report another quarter of record performance. In the third quarter of 2015, we delivered net sales of $19 million, up 57% versus the year-ago period, representing our ninth consecutive quarter of at least double-digit year-over-year growth. Rising sales also helped us leverage fixed manufacturing costs and expand our gross margin to 83%. These results reflect the strong momentum that continues to build behind our iStent Trabecular Micro-Bypass Stent, which is our flagship product in a series of proprietary, market-expanding glaucoma technologies we are preparing to introduce in the coming years. Glaucoma, as you know, is a chronic largely asymptomatic disease that causes optic nerve damage and results in progressive irreversible vision loss. Reducing intraocular pressure or IOP is the only current proven treatment. To control intraocular pressure, physicians typically prescribe one or more topical medications for patients to administer several times a day for the rest of their lives. High noncompliance rates, cumulative chronic and local side effects, preserved [ph] toxicities and other factors often render these therapies ineffective or intolerable to many glaucoma patients. When medications fail, physicians sometimes use laser procedures to attempt to improve outflow, but these procedures yield high-failure rates over time. Invasive surgical options exist, but long recovery times, complications during and after surgery and high-failure rates relegate them to treatments of last resort for a small percent of patients with advanced refractory glaucoma. Glaukos pioneered Micro-Invasive Glaucoma Surgery, or MIGS, to provide better treatment alternatives for managing IOP. iStent is the market's first MIGS device, and we're developing what we believe will be an unrivaled series of flow and drug delivery platform implants that create a titratable treatment algorithm designed to achieve target…

Thanks, Tom. Good afternoon, everybody. As Tom said at the top of the call, net sales rose 57% to $19 million versus $12.1 million in the same quarter of 2014. This performance reflects strong growth in U.S. sales, which were responsible for 98% of the year-over-year increase. U.S. sales represented 95% of total net sales in the quarter. Increased unit volume worldwide was primarily responsible for the rise in third quarter net sales as we grew our surgeon customer base and increased overall iStent utilization. Our gross margin expanded during the third quarter, increasing to 83% of sales versus 81% in the year-ago period. Strong top line growth relative to fixed manufacturing and amortization cost was largely responsible for the improvement. Turning now to operating expenses. SG&A expense rose 68% to $11.2 million in the third quarter of 2015 versus $6.7 million in the third quarter of 2014. Higher legal expenses associated with our recently settled patent litigation were responsible for $1 million of the increase in SG&A in the third quarter. The remainder of the increase reflects primarily higher personnel, travel and other costs related to our ongoing efforts to build a global infrastructure and sales organization that can continue to drive and support our growth. Keep in mind that as we transition from distributor to direct sales models in selected international markets, as Tom described, we'll see the benefit of reporting revenues at end-user pricing in these markets rather than discounted distributor pricing, but we'll also be incurring the operating expenses attributable to these subsidiaries. R&D spending rose 21% to $6.2 million in the third quarter of 2015 versus $5.1 million in the year-ago period. The rise reflects primarily the cost of additional clinical affairs personnel required to manage the increased number of clinical studies and associated investigational…

Okay. Thank you, Rich. And so to recap, Glaukos delivered solid third quarter financial results fueled by continued iStent adoption among a growing number of surgeons. We're extending our global footprint through a combination of direct operations in select markets and strategic distributor partnerships, and we are advancing our robust and differentiated pipeline to build this global MIGS market and seize the leadership position in the $5.1 billion glaucoma market. So with that summary, I'll open up to questions. Operator?

[Operator Instructions] Your first question comes from Mike Weinstein with JPMorgan.

Tom, let's start with the depth part of the equation. You gave in your prepared remarks a few metrics for tracking the number of physicians that have implanted, the number of accounts that you guys are in. Help us with the depth picture. Give us a sense of kind of where you are you think overall on penetration of those accounts. So there's still a lot more accounts for you guys to get in, but really it seems like the bigger opportunity is going to increasingly be the depth and the percentage of those cataract procedures in glaucoma patients that you can take on.

Yes, I'd be happy to. In fact, I'm actually going to turn this -- what I would tell you, Mike, is that we're really at the embryonic stage of penetration within these various accounts, where we worked hard to be able to train them. We've created a sales force that we call kind of seals force that's dedicated to going in and training these surgeons on how to identify patients in their practice who are undergoing combined cataract procedures and being able to presell them from the time they come in the practice all the way through the time that they would be candidates for combined cataract glaucoma procedures. So we are very, very focused on going from what I would call kind of topsoil pulling of oil to frac-ing and going deep within the practices. But let me turn it to Chris to give you some further analysis.

As you know, it's difficult to get to the penetration percentage for each individual doctor because our purchasing entities are both hospitals and ASCs, but we're very happy with the growth that we've gotten within those facilities. We continue to add doctors and we continue to go deeper with those docs in terms of getting a higher percentage of their cataract procedures. As Tom mentioned, we have this seal team that are working with the individual practices to get better penetration, and we're quite happy with where we are at this point.

And Tom, one of the talking points from your prepared remarks is really on this discussion of how much better the data has been getting over the last couple of years, going all the way back to the original U.S. trial. My question for you is, is in your perspective, and Chris, jump in here as well, how much do the docs appreciate -- the cataract surgeons, the glaucoma specialists, how much do they, at this point, appreciate the stream of data that continues to roll out here, and showing obviously much better results than we saw initially from the U.S. pivotal?

So let me answer that, Mike, by telling you that it's not well appreciated, and we continue to cull data and to see this kind of take place right in front of our eyes. And it's become quite an extraordinarily delight to see the data that we are able to or the surgeons are able to produce today with a single iStent in combined cataract surgery versus what we got or what was achieved in a clinical U.S. pivotal trial, which was conducted really started over a decade ago to begin enrollment and published its first data or submitted its first data at the end of 2008. So let's review why that might be the case. Well, if you look at the U.S. pivotal trial that we conducted in the late 2000s, we had 29 investigative sites. Of those sites, more than half of those surgeons did less than 5 cases. There were no training cases. All cases were enrolled in the study from the very first time point. Many of those surgeons didn't do cases or spent several months between cases before they did their next iStent. And when you've been to some of the lectures, you'll hear from Ike and from others that when the early phases, there's a tendency to do superficial placement of the stent, sometimes within the juxtacanalicular matrix of the trabecular meshwork, and that may, indeed, impede flow. What we do know that is it takes us about 15 to 20 cases in surgical training for surgeons to truly get their sea legs and become acclimated to the placement of the device. Thus, somewhere on the orders of 3/4 or more of surgeons in the initial investigational study we did, never had that training, and implemented the iStents as part of the study. We…

And then let me -- last question and let some others jump in here. The...

Mike, one other thing. We're going to present this data as part of our symposia and start to make clinicians as well as analysts and investors aware just how good the single stent data is getting and make them quite sanguine about us maintaining our leadership position.

Well, that's part of what I want to get to. I thought you made some -- I thought appropriate comments just talking about the iStent approach and going through the trabecular meshwork versus going into the suprachoroidal space. And the trade-offs of one versus the other, obviously, you've got a suprachoroidal program because your view is that, and I've heard this from certainly a number of the clinicians we have spoken to, your view is that the suprachoroidal approach is just inherently a risky approach because of the risk of hypotony, because of the risk of encapsulation or regrowth, those of us who have covered stents for a while think of it as restenosis, because of the risk of having a hemorrhage. Is that captured well just in terms of the trade-off of between the 2 approaches that you probably get comparable efficacy, but there's a higher risk approach in going through suprachoroidal.

Well, I think it does. And I think it really speaks to, one, the fact that we're getting such great pressure reductions within the trabecular bypass based by restoring conventional outflow. There's really, in our mind, no need to subject patients to the sequelae associated and the adverse events of going in the suprachoroidal space as first-line therapy. Now having stated that, we believe in this space. We were actually producing, as you know, developing a product for the suprachoroidal space. But we believe in that space in its right context, and that is from a benefit-to-risk standpoint, we believe that the suprachoroidal space should be reserved as second-line therapy, as do most of the colleagues that you'll talk to in the field, should be reserved for second-line therapy in order to provide a synergistic dual physiologic approach to achieve ever lower target pressures in patients with progressive glaucoma. That's how our SAB [ph] has asked us to position it. We are doing so, and I think it's beginning to resonate within the community.

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

So just to really follow up on that competition or on that question because it kind of gets to an issue that a lot of investors are talking about over the last couple of months, given some of the announcements that have been made, is really the competitive landscape. And you guys did a great job kind of outlining your portfolio of products. But I was curious if you could give us your view on when you expect competition to enter the marketplace. And just you've commented a little bit already, but just some general thoughts on that competition.

Yes, I'd be happy to, Bob. So, one, we respect all of our competitors. And that being said, if -- and again I'm making an educated and presumptive guess on when these will be -- these products will be available, and I think you have your own thoughts. But I would tell you that it would not surprise me if AquaSys was commercially available before the end of 2016. It would not surprise me that Transcend Medical would not have an approved -- approvable product in the first half of 2017. And it would not surprise me that Ivantis would have a product available in the 2018 to 2019 period. That gives you an idea somewhat of the spread. Now when we start to cut through what really is competitive with what we're doing, and again, this is a partisan view, but one that I hold firmly, the AquaSys is really a compelling alternative for patients who have refractory glaucoma disease. That's its indication. That's where they're headed to get a 510k approval for patients with refractory glaucoma. And if you think about it, it makes sense that doing this procedure, you need to use mitomycin. In most cases, you establish a blob. All the issues that are associated with the trabeculectomy will be associated, we hope to a lesser degree, with this procedure, and we think it can be a compelling alternative to trabeculectomy or to aqueous shunts. And we think that, that procedure will resonate somewhat within the glaucoma community as an alternative for this more niche and stage market. We've already talked about suprachoroidal stents. Again, I'll take the road of saying that our suprachoroidal stent, we believe, is the least invasive device that's been developed for that space. But even saying that, again, we would take…

And then just as a follow-up. The timeline that you guys have laid out for your pipeline work under the assumption that 2-year follow-up will be required. Can you just talk about the potential for that time frame, that follow-up time frame to be potentially reduced? And then I also just wanted to make sure I heard you right on the number of salespeople that you had exiting the quarter.

Yes, I'd be happy to. So let's first take -- so you brought us something where earlier this year, as you know, Bob, the FDA issued draft guidance for premarket MIGS studies, recommending that all subjects be followed for a minimum of 12 months, and that makes companies provide justification based on the benefit risk analysis for any follow-up that's less than 24 months. And so we think that we have a reasonable opportunity to approach the FDA. We need to surmise what the FDA wants in terms of criteria to establish a benefit-to-risk ratio that could potentially reduce our follow-up time, particularly with our second-generation iStent Inject to 1 year versus 2 years. So we're currently evaluating that. And if you think about it, we enrolled our last patient in July. So I would expect you will be hearing from us by mid-next year or so whether, one, we contemplated and took action on this; and two, whether or not the FDA granted us the ability to reduce our follow-up to 1 year. Now as you know, one of the things that we'll need to contemplate in those discussions are really what statistical penalty, if any, we'll need to pay going from a 2-year trial to a 1-year trial, and we'll also need to sort out what are some of the competitive as well as coverage advantages of following patients for 2 years. But I would tell you that it certainly is on my mind, and I will tell you that we are undergoing an evaluation and that we would expect to engage with the FDA over the next several months to look at that as an alternative.

And Bob, this is Chris. I wanted to address your question about sales reps. We exited the quarter with a weighted average of 45 representatives, which is flat to what we had in the second quarter, but that's a bit misleading. And then we had a few representatives who were promoted into sales director positions and filled them late into the quarter. And I can tell you that in October, we had a training class where we had a number of sales representatives bringing our total up to 50.

Your next question comes from David Roman with Goldman Sachs.

I wanted to start just as a follow-up on the clinical side, Tom. One of the things you talked about in your prepared remarks is your view that the outcomes continue to improve as physicians either gain experience or as your training protocols continue to evolve. Do you have -- are you going to present data or do you have data if you look at a subset of any of your clinical studies that compares call, like the first 50% of the patient implants versus the second 50% of the patients implanted in any one clinical trial just to quantitatively prove out what you're sort of observing in practice?

Well, I think what I do have is what I mentioned in the prepared remarks, David, and that's a list of doctors that we've been following now with retrospective data. We actually have 6 -- forgive me, 5 surgeons that reached 160 eyes. And with this data, we're driving pressures down to 14.6-millimeter means with a substantial reduction in medication. And so what I would probably point you to are those kind of very, very compelling results versus the results we achieved again in a 10-year-old U.S. pivotal trial. And I would use that as your base of comparison. I'm not aware that we have data with each of these surgeons through their first 20 cases. We can go back and check, but I think we can be able to look at some of the data that came out of that early pivotal study and see it's quite compelling how much better the results have gotten across the board.

Okay, that's helpful perspective. And then on the commercial side, as you look at the account growth, I think you've quoted over 40% growth in the number of accounts as well as 40% growth in the number of trained physicians in the quarter. What type of accounts are you penetrating right now? How would you characterize the physician who's picking up iStent? Or is it now still -- or are we talking about relatively high-volume academic-type users, community users? Maybe give us some sense of the dispersion within the installed base of implanting physicians.

It's still a mix of all types of ophthalmologists. It's more heavily weighted on the comprehensive ophthalmology side than the glaucoma physician side just because there's fewer glaucoma physicians than there are comprehensive ophthalmologists. I would say we're still in the early adopter group, and it's a mix of high-volume, medium-volume guys.

Okay. And then my last question just from a utilization perspective, as you look across your current physician base, is there a fairly-wide difference between your highest volume users and your lowest volume users? Or are you seeing early adopters be able to pick up the procedure relatively easily once they get through your training programs?

There's definitely -- as a general rule, physician's adoption rates get higher the more comfortable they get with the procedure. They tend to go a little slower, get their sea legs. And part of that's by design in terms of the way that we train these physicians. And then as they get more comfortable with the procedure over time, the utilization typically goes up.

Okay, and sorry, just one more for Rich. In your prepared remarks, you talked about the vast majority of the 95 -- sorry, the U.S. sales growth coming from unit volumes. Can you maybe give us a sense of what's happening on the pricing side? And I think at the time of the IPO, you'd sort of thought that it was reasonable that pricing would decline over time. How are you feeling about that assumption relative to what you're seeing thus far in the rollout?

I'd say that was a conservative assumption, and selling prices are holding. I think we saw a slight improvement in average selling price during the quarter, but completely outweighed by the growth in unit volume. That's where the vast majority of our growth came from.

Your next question comes from Brian Weinstein with William Blair.

Maybe talking a little bit about the guidance that you provided for the fourth quarter. It looks like on the low end, it would be kind of flat sequentially, a little bit lower than kind of the growth rate, obviously, we've seen sequentially from you guys in the past. Can you just talk about how you came up with your guidance and what the thought process is? Is there some seasonality there? Is there any kind of an impact from going direct in certain countries as opposed to distribution that would impact the top line? Just some color will be helpful.

Yes, I think -- thanks, Brian. I think we really took a look at comps. We looked at what our original projections were for the quarters and how we performed against those projections by quarter. And then we kind of looked at what kind of a comparison we had to achieve growth on from a year ago. And so the guidance we came up would have us somewhere in the range of 35% on the low end to 42% on the high-end growth for the quarter, which as the revenues go up, the comps get tougher. There was an expectation from the very beginning that the growth rate would start to come down a little bit, but we still think that's a very healthy growth rate. And while we didn't feel strongly enough about it to want to move the guidance range up above what we gave, we certainly have some -- we believe there's plenty of opportunity for us to go above that. We're just -- did not want to guide the Street to that at this point. We still have a lot of time left between now and the end of the quarter.

Got it. And then a question on reimbursement. How do you guys think about, as people may be using multiple iStent product to your -- how do you think about reimbursement for multiple stents -- incremental data that's needed or timeline to maybe get some incremental reimbursement for those people that are kind of using multiple stents today? Is that even a possibility? Or is that something we really just have to wait for FDA approval of other products and then move on from there?

Yes. So, Brian, this is Tom. So what I would tell you is that right now, there are some clinicians that are using multiple stents and are getting reimbursed, and we suspect that those are probably going under the grid at some of the payers that are paying for these stents. There is no current provision in place for the reimbursement of multiple stents. As we go forth, I think, the latter part of your question, yes, we're going to be working hard at figuring out either how to optimize an APC that will pay for multiple stents in the future. And by doing so, we'll need to create either compelling clinical data going into a commercially available iStent Inject and/or use some physician-sponsored IDE trials to start creating charges today with multiple stents that will create a charge history that we can present to CMS in order to be able to advance the cause for a more prolific APC in the future. Now having said that, both of those are Herculean, but it's not anything that our ambition has kept us away from before. So we'll be working hard to try to optimize payment schemes for multiple stents over the next couple of years prior to the commercial injection of iStent Inject.

That concludes the Q&A portion, and I'll now turn the call back to Mr. Burns.

Okay. So I want to say thank you very much. Thanks for joining us. Thank you for your continued support. Look forward to our next earnings call. Have a great day.

Thanks, everybody.

This concludes today's conference call. You may now disconnect.