Welcome to Glaukos Corporation's Second Quarter 2017 Financial Results Conference Call. A copy of the company's press release issued after the market close 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 and Corporate Marketing.

Hello, everyone. Joining me today are President and CEO, Tom Burns; Chief Financial Officer, Joe Gilliam; and Chief Operating Officer, Chris Calcaterra. Following our prepared remarks, we'll open the call to questions. [Operator Instructions]. Please note 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 product, our pipeline technologies, 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 operation 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 risk factors. You'll find these documents in the Investors section of our website at www.glaukos.com. Finally, a quick reminder that Glaukos is hosting our first-ever Investor Day at the St. Regis Hotel in New York City on Thursday, September 14, beginning at 8:00 a.m. For more information and to register to attend, please visit the Events & Presentations page in the Investors section of our website at www.glaukos.com. With that, I'll turn the call over to Tom Burns. Tom?

Thank you, Sheree and good afternoon to everyone. Thanks for joining the call today. Glaukos reported second quarter net sales of $41.3 million, up 45% versus the year-ago quarter and marking our 16th consecutive quarter of more than 40% year-over-year growth. Our top line performance reflected continued strong volume growth of iStent and iStent inject globally, along with the 2017 iStent price adjustment in U.S. ambulatory surgery centers or ASCs. We remain on track for the year and we're reaffirming our 2017 net sales guidance of $162 million to $167 million. Consistent with prior quarterly calls, I'll review our progress in the quarter in the context of our core growth objectives which are, one, to fuel U.S. adoption of iStent in combination with cataract surgery; two, to fortify our MIGS leadership with next-generation iStent devices; three, to advance our novel iDose injectable drug delivery platform; and finally, four, to expand our direct sales operations into high-value international markets. I'll begin with the U.S. iStent adoption. We continue to make considerable progress on our core objective of driving MIGS and our iStent franchise towards becoming the standard of care for comorbid glaucoma and cataract patients. These efforts were evident in a recent Market Scope survey of U.S. cataract surgeons, where 44% indicated that they plan to increase or add surgical treatment of glaucoma to their practice in 2017, up from 29% in a similar survey just 1 year ago. Our U.S. sales organization has now largely completed the rollout of the price adjustment driven by the unprecedented rise in 2017 Medicare facility reimbursement for combination iStent cataract procedure done in ASC setting. As you know, we implemented this pricing change via a methodical conversion process where reps and customers conducted a series of one-on-one conversations about the Medicare reimbursement increase, our…

Thanks, Tom. As noted earlier, our second quarter net sales rose 45% to $41.3 million versus $28.6 million in the same year-ago quarter. Growth was driven by strong unit volume increases worldwide and higher ASPs in the U.S. U.S. sales were $37.1 million and grew 41% versus the year-ago quarter. In the U.S., we experienced improving year-over-year volume growth trends each month throughout the quarter as more ASC customers exhausted the inventory they purchased in December and January ahead of the price adjustment. At the end of the second quarter, we estimate that only a small portion of this inventory remained on customer shelves. Our international sales were $4.2 million in the second quarter, up 87% versus the year-ago quarter and representing 10% of total net sales versus 8% 1 year ago. Again, this quarter, Germany, Australia and Canada, where international direct sales operations have been underway for a year or more, were responsible for most of the year-over-year increase. On a sequential basis, international sales grew 4% compared to the first quarter of 2017. In Australia, we're working with Department of Health to resolve some transitory issues associated with the interim MBS code that we discussed in more detail on our last earnings call. At the same time, while still early, we were pleased to see growing sequential contributions from Japan, Brazil, the U.K. and nearly all of our recently established European markets more than offset the temporary headwind in Australia. Moving down the income statement. Our second quarter gross margin was 87% of sales versus 85% in the same year-ago quarter. We attribute the expansion primarily to the U.S. price adjustment in the ASC. We're pleased with the continued gross margin expansion; however, continue to advise investors to expect that gross margins may remain in the mid-80s percent…

Thank you, Joe. And so to summarize, we're pleased to deliver another quarter of solid financial and operational performance. Our record quarterly sales reflect the continued strong demand for our iStent technology and the successful execution of an ASC price adjustment. Our U.S. sales organization is fully focused on training new doctors and increasing iStent utilization in existing practices while our market access team works to ensure consistent commercial carrier payments at 2017 reimbursement rates. These commercial efforts are supported by a growing body of compelling evidence that demonstrates the efficacy, safety and cost efficiency of iStent platform. Our pipeline of novel flow and drug delivery technologies is moving forward on plan and fortifying our leadership position in the emerging MIGS marketplace. Finally, we're making significant strides to expand our presence in targeted international markets and to strengthen our long term growth potential. So with that, I'll open the call up to questions. Operator?

[Operator Instructions]. Your first question comes from the line of Mike Weinstein from JPMorgan.

Just a couple of housekeeping items first. Did you give international number? And then second to that. Can you give us any commentary on U.S. growth between volume and price this quarter?

Sure. Mike, it's Joe. First, on the international sales we gave, it was $4.2 million in the second quarter, up 87% versus the year-ago quarter, 10% of total net sales, okay? Second, on your question on the contribution of price versus volume in the quarter. Consistent with our past statements, we don't plan to break out the specifics for competitive reasons. But what I will do is comment on some of the trends that we experienced across the key drivers there from ASP to volumes. First, on ASP. We did experience some improvement in the average U.S. ASP in the second quarter as you'd expect, given the price adjustment was largely implemented heading into the quarter. It's important to factor, though, that the countervailing impact from customer contracts, the majority of which became effective heading into or during the second quarter. On volume, we did experience, from an organic standpoint, sequential volume growth in Q2. And within the quarter, we experienced improving our year-over-year volume growth trends each month as ASC customers exhausted inventory they purchased in December and January. And the last thing I'll comment on which we've talked about on prior calls which is the impact of the inventory load-in, as we call it, from December and January, where we believe that, that impact in the second quarter, as we stated before, was about $2 million heading into the Q2.

You anticipated my question. It's all very helpful, Joe. A couple items I want to follow up on. So one was the commentary on the Supra time line. It appears as if you're now assuming you'll be able to submit with 12-month follow-up data. And so I just wanted to clarify all that. That's one. And then two, with iDose having completed enrollment, I believe it was beginning of May and with the follow-up, is there any chance you'll have that in time for your analyst meeting? And if not, what else can we expect at the analyst meeting?

Okay. Mike, this is Tom. So to your first question, I guess, I would clarify and say that since we finished enrolling this clinical trial earlier this year, we expect to have that data baked for 2 years for safety and efficacy. And because of that, we would expect to be in a position with just the way that we produce, we think, formidable PMAs on an expedited basis to submit that in 2019. So that was -- just to clarify, we do expect the 2-year follow-up for that. And then on the Investor Day...

So you're going to wait -- you're waiting for the full 2-day -- you'll wait for the full 2 years? You won't submit a 1-year. Okay.

That's correct. Yes. On the Investor Day, I thought it was a very, very good time and important that this kind of 2-year anniversary from our IPO that we reconsolidate and look at our addressable markets; that we show the investment community how we'll continue to lead and sustain our leadership position into the 2020s, how we'll look at addressable markets, how we'll segment the market, how we'll look at indication-based management with our new products and how those will play into the various segments and then how we build this company into a formidable business. And so I would expect it to be a very comprehensive and a foundational approach to where we go in the coming months. With respect to iDose data, I guess, I would stick with what I have said before. We're encouraged with the progress we're making. We expect to make a public statement on the safety and efficacy by year-end. If that happened in the Investor Day, it's not inconceivable, but I would stay with the party line of saying that we'll have it by year-end.

Your next question comes the line of Bob Hopkins from Bank of America.

So I just wanted to follow up on a couple things and trying to focus on the U.S. business. I just want to make sure I heard some things correctly. In terms of the drags on unit growth in Q1 -- and obviously, Q1 growth was strong overall, but you did mention a couple of drags and I want to make sure I'm quantifying them correctly. So the inventory build that you mentioned last quarter, that was a $2 million drag this quarter. I mean, that's one question. Then the other one was you kind of cited 3 headwinds that affected unit volume growth that were related to the recontracting that went on. And I was just wondering if you could take a shot at quantifying those headwinds in this quarter and how long you expect those to kind of persist.

Yes. So this is Joe. Bob, first, I can confirm you heard that correctly. Look, my understanding of what you said is that the $2 million impact we expected, we did experience in the second quarter. Second, with respect to Tom's prepared remarks around the commercial payer reimbursement dynamics in the second quarter, we won't give specific on the exact quantification. But what I can share is roughly 20% of the patients who meet the FDA indication price then are covered by private health insurance companies. And a material number of our customers are impacted, both in terms of their overall usage of the iStent commercial patients as well as with selected commercial payers. While we expected this issue, the pace of the private payer company conversions has gone slower than we would have liked.

And so how long do you think that will persist as a headwind?

Well, I think it's difficult to quantify that and set a precise time. Obviously, we would like to make considerable progress over the second half of the year. We would expect to make a majority of that progress in the third quarter.

Okay. And then lastly, I appreciate your comments on CyPass and Alcon. And I'm just curious, are you able to give us a sense with your reiteration of guidance kind of what you're assuming for your own market share in the MIGS marketplace in the back half of the year? This was implied in the guidance.

Yes. I think I'll answer that, Bob, by saying that I would be reluctant to give any market share data. I will say that we clearly respect Alcon as a competitor. I'm highly focused and prepared for them to come into the marketplace. I will tell you, if you look at any granular basis, they have announced that they're looking to train 700 surgeons by year-end. We have heard and we have direct knowledge that they're sampling these surgeons, typically giving 5 samples to each, selectively giving 10 samples to other surgeons. So given just some granular quantification just at a pure sponsor sampling level of what we would expect in terms of procedures, that would be conceivably taken away from iStent. Beyond that, we're well prepared. We're holding conferences. We're already engaging. We've seen a more deliberate step-up by Alcon which we expected in July. And I think we have also heard informed surgical opinion which gives us -- makes us confident that we're on right positioning and we're taking the right approach to the treatment algorithm for the treatment of glaucoma.

And the next question comes from the line of Larry Biegelsen from Wells Fargo.

It's Adam in for Larry. I wanted to stay with competitive dynamics and ask about Ivantis. We expect them to be the next MIGS player to market likely in first half of 2018. So I wanted to ask about the Hydrus-sourced study, what your expectations are for the data and then, I guess, just more broadly how you see the Ivantis device competing against the iStent and iStent inject.

Adam, this is Chris Calcaterra and good to hear from you. And as you know, the 2-year follow-up for the Ivantis study was completed in the March-April time frame. We expect them to submit by the end of the year. We obviously don't have any visibility to their data. We have seen some data out there that suggests that their IOP mean is in the 16.5% range and we would expect that we'll see similar results with their PMA study. We're very encouraged by our own product in that in and around the same time as they get approval, we should get approval for iStent inject, where we've seen data of ours with the IOP ranging anywhere from 14 to 16 millimeters of mercury and that is in a stand-alone procedure. So we're quite bullish on our product versus the iStent -- or excuse me, versus the Ivantis product. But we respect all competitors and will be prepared for when they launch their product.

Okay. That's just helpful. And then just as a follow-up. I wanted to ask about Noridian. I recognized what you said in the prepared remarks. But just wondering if you've seen any impact in terms of adoption or usage in those states that fall under Noridian jurisdiction.

Sure and another good question. Yes. This is something we're -- we've been following closely. However, this went into effect in May and we really didn't start to see the claims or the providers didn't start to see the claims payments until June. We have seen a modest impact on those areas that are covered by Noridian, but we still believe that iStent is becoming more of a standard of care for comorbid disease, glaucoma and cataract surgery. So that, we think, will have a positive impact. Additionally, for many of these providers, they own their own ASC. And therefore, they are the beneficiaries of the higher facility payments and the profitability that they've gotten from that. So at this point, it's been a modest impact to those specific areas and a minimal impact to our overall business, but it's something that we'll continue to monitor. Any other questions, Adam?

That's perfect.

Your next question comes from the line of Jon Block from Stifel.

Maybe one on competition and then one on long term market sizing. Just first, on competition. And now that CyPass -- I mean, you mentioned it's out there; it's commercialized. Do you guys still believe it will be predominantly specific to the glaucoma specialists? And maybe they're actually getting a little bit of traction in First Coast because they've got that MAC on board. What are you actually seeing out there? Has that changed your thoughts? Have you seen any greater uptake arguably among the other subset, high-volume cataract surgeons, than you may have believed 6 or 12 months ago pre-commercialization? And then I've got a follow-up.

Yes. I can answer that. I would say that, if anything, it confirms our initial thought pattern. I mean, I think we have always said along -- all along that glaucoma specialists would be intrigued with the space. They have been operating in the space for the past 70-odd years, doing cyclodialysis clefts. They understand the collateral damage that can be brought by entering the suprachoroidal space. And because they're so focused on reducing IOP to the lowest lever -- level and moderately advance to advanced refractory patients, they're willing to use the suprachoroidal space as a vehicle to achieve normative intraocular pressures and very low intraocular pressures. But with respect to high-volume cataract surgeons, I would say that while it is early, I think it confirms our belief that these surgeons are quite focused on delivering the highest standard of refractive care when doing the cataract surgery and really are quite discriminate and intolerant of any types of side effects or adverse events that would disrupt the delivery of care. And so while we have always believed that surgeons will try the procedure, we said that time and time again and high-volume cataract surgeons will try this to see where it fits in this [indiscernible], we believe strongly that when the issues of hyphema, hypotony, intraocular pressure spikes and other adverse events are manifested which we know they will be from the published literature, that it will further confirm and substantiate, I believe, that this will be largely used by the glaucoma specialists and largely and enthusiastically embraced by the glaucoma specialists.

Great. Very helpful. And then just to shift gears on the market sizing. Stand-alone market, obviously a tremendous opportunity. I think it was last conference call, you mentioned how the sweet spot within that market would be pseudophakic patients. We had some similar conclusions from our diligence. But do you have data on how that stand-alone market breaks down between pseudophakic and phakic? And clearly, this is a longer term question. But maybe if you have any data on the percent of one group for the other, that would be helpful for us as we think out and try to size the opportunity.

Yes. So I will tell you that we're in active determination right now, looking at just that issue. And I think we have as good a view on that as anybody and we expect to be in a leadership position, outlining the segmentation of that marketplace. And so what I would tell you is that stay tuned and attend Investor Day and I think you'll be able to see exactly how we view the marketplace.

Your next question comes from the line of Chris Cooley from Stephens.

Maybe either for Chris or Tom. Could you maybe update us here when you think about the U.S. market, first, in terms of the percentage of practices that you would classify as active MIGS users? Maybe just trying to differentiate that versus those that are just now starting out. Then if I can maybe push a little bit more on the volume versus price aspect. Any color from, like, a same surgeon or a same center base as you could provide? I'm just kind of curious. You mentioned that the volume growth improved sequentially throughout, well, I should say, on a monthly basis throughout the course of the quarter, but didn't know how much of that was due to just maturation of surgeons that train versus greater utilization maybe post trialing from those more established practices.

Sure. Chris, this is Chris and I'm going to address the first one which is -- that's a hard one to quantify in terms of the percentages of practices that are utilizing iStents versus those that are not and what percentages have been on board for a period of time and so forth. With the advent of the load-ins in December and January and trying to quantify when that product has been utilized, it's hard to get an idea of "penetration rates." You've got competition now. There's a lot of noise in the channel. So I don't have an answer for you on that one. In terms of the second question which was same-store sales growth, I think it's fair to say that in Q2, the same-store sales growth was modest, that the majority of this increase was in units. And the reason for that was the challenges that we talked about in the prepared statement around the coverage and the policies of the commercial payers and particularly the payment of the commercial payers. You've also got some of the doctors trying the CyPass device, so giving as many as 5 to 10 sample products. So that made same-store sales growth be flat to minimal and the majority of increase in Q2 then came from the new surgeons which we converted or trained and that number being 2,750. So most of it was volume-driven in the second quarter.

Our last question comes from the line of Matt O'Brien from Piper Jaffray.

This is JP on for Matt. I wanted to ask just one the Q3 guidance you gave. Because if I understand it correctly, it is around a $2 million headwind from the inventory that hit you in this quarter. You guys have never really been flat sequentially and you said volumes are improving sequentially month-to-month. So I'm just trying to figure out why the range is what it is and so just factoring just the kind of ramp you saw up in July from Alcon. Or what are kind of the puts and takes there?

Yes. First, this is Joe. I think we often have seen in the Q2, Q3 time fairly similar results from the second quarter to the third quarter. To the part of your question what's driving the guidance, I think we have to take into consideration the exact things that Tom elaborated on in his prepared remarks, right? That's the -- number one, the full impact of some of the commercial payer disruption that's happening and the pace of resolving that in the third quarter as well as the continued trying and trialing from CyPass as they continue to train physicians and head towards their 700-surgeon target for the year.

Got you. And then if I could sneak one more and then Alcon. A, is the sampling sets they're giving out, the 5 to 10, is that more focused on the glaucoma specialists right now? Or is this kind of broadly cataract and glaucoma? And then have you heard any kind of real-world incidents of some of the higher risks and complications that we've talked about on this call before?

This is Chris. And yes, the majority of the people who are trialing the CyPass device at this point in time are glaucoma specialists. Not to comprehend some guys haven't trialed it, but the vast majority are to glaucoma specialists. And the general checks that we're doing, the conversations that we're having supports what's in the literature in that the efficacy is similar to our pivotal trial data and that the risk ratio or the potential for a complication is higher. And we stand by what we have said, the -- it confirms what's in the literature and we feel bullish about that.

There are no further questions at this time. Mr. Tom Burns, President and Chief Executive Officer, I turn the call back over to you.

Okay. So thanks to everybody today for being here and your continued interest in our company. I will say for those planning to attend our Investor Day on September 14, we look forward to seeing you and having a very productive meeting in New York. Thanks very much and goodbye.

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