Welcome to Glaukos Corporation's Third 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [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; CFO, Joe Gilliam; and CEO, 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. The 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 SEC filings for more information about these risk factors. You will find these documents in the Investors section of our website at www.glaukos.com. With that, I'll turn the call over to Tom Burns. Tom?

Okay. Thanks, Sheree, and good afternoon, everybody. Today, Glaukos reported third quarter net sales of $40.4 million, up 37% versus the year-ago quarter, reflecting the continued global adoption of iStent and iStent Inject, along with the 2017 iStent price adjustment in U.S. ambulatory surgery centers or ASCs. We are also reaffirming our 2017 net sales guidance of $155 million to $160 million. In United States, I'm pleased with expanded adoption of our beachhead iStent device continues to drive mix towards the standard of care for co-morbid glaucoma and cataract patients, while generating the growing revenue in cash flows that fuel our deep late-stage pipeline. At the same time, we continue to invest and strengthened our domestic commercial sales and marketing organization to provide optimal resources for training new doctors, driving utilization in existing practices, obtaining broad reimbursement and increasing iStent awareness with optometrists, potential patients and others. This investment is evidenced in the tremendous expansion of our global commercial sales organization from 65 individuals at the time of our IPO to 177 today, including more than 90 Glaukos professionals currently serving the U.S. mix market. Under the reimbursement front, CMS has now published their final 2017 fee schedule. The final schedule is consistent with the proposed draft and is a reaffirmation of 2017 reimbursement increase that was implemented when 0191T CPT code describing iStent implantation received a device intensive offset designation. These reimbursement adjustments remain an extremely positive longer term development for the iStent platform and a meaningful recognition of the value it makes to the healthcare system overall. We continue during the quarter to increase the ranks of trained U.S. surgeons with the goal of having more than 3,000 fully trained by the end of this year, a portion of which includes glaucoma fellows and residents at teaching hospitals.…

Thanks, Tom. As noted earlier, our third quarter net sales rose 37% to $40.4 million versus $29.6 million in the same year ago quarter. Growth reflected unit volume increases worldwide, higher ASPs in the U.S. and international expansion. U.S. sales were $35.6 million and grew 32% versus the year-ago quarter. As discussed at our Investor Day, our strong U.S. growth has been impacted by several headwinds. First, we believe commercial insurance disruptions remained the most significant headwind in Q3. As we said previous, about 20% of our target patient operation falls under commercial insurance and while virtually all of the 100-plus national commercial unit policies have already been updated to reflect the current Medicare rate, we continued to be impacted by legacy rate schedules at many of more than 500 affiliated sub-payers and plans and thousands of individual provider payer contracts. Our newly expanded reimbursement team is now working diligently and making progress with customers to ensure these rates are updated as efficiently as possible. This remains largely an account by account administrative issue, and we continue to believe it is a question of when and not if we'll convert this vast majority of the situations to new reimbursement rate. In the meantime, we've introduced several initiatives to help customers manage through the situation. As we have evaluated the pace of resolution sitting here today, we do expect this issue to decline, but persist through the first half of 2018. Next, the recent hurricanes did temporarily impact iStent procedures in Houston, Florida and to a lesser extent the southeast United States. We did start to see the return of these accounts during the second half of September and believe that most of the iStent practices are now back up and running, but patients remain impacted and does it may be…

All right. Thanks, Joe. As the MIGS pioneer, Glaukos continues to build this promising new glaucoma treatment class and if so doing manage the inevitable near-term challenges, increase completion in the combo cataract segment of the market. This initial stage of our commercial development is important because it lays the groundwork necessary to achieve our broader goals. To establish Glaukos as an ophthalmic pharma device leader with unique microscale flow, sustained pharmaceutical systems and diagnostic platforms. Beginning in 2018 and extended well into next decade, our pipeline is designed to deliver an annual cadence that we expect will deliver 5 or more new market expanding products and to truly transform the treatment of glaucoma. At the same time, we're making significant strides to provide presence in key high-value international markets and to expand our organizational skills and capabilities abilities so that we are well positioned to capitalize on the tremendous potential that lies ahead. We've never been more optimistic about the future for Glaukos and our ability to deliver sustained, long-term value to shareholders. So with that, I will open it up to questions. Operator?

[Operator Instructions] Your first question comes from the line of Michael Weinstein from JPMorgan. Your line is open.

Good afternoon, guys. Let me start with the quarter, if I can. So at the September analyst meeting, September 14 you lowered your third quarter guidance and there was a whole launch of kind of issues, including the hurricanes that you called out and the headwinds for commercial reimbursement now in Australia, which you mentioned. Quarter ended up coming in better than the lowering of the guidance you were at $41 million to $43 million, you lowered to $38 million to $40 million. You ended up beating that range. And it looks like its relative to street expectations and with the combination of U.S. and international. So can we just spend a minute on the second half of September and why exactly that the second half of September was a little bit better than you expected?

Sure. Thanks, Mike. This is Joe. I'll start and then Tom or Chris can add any additional any commentary. I think the second half September obviously is implied by everything you said was certainly stronger than what we saw leading into the Investor Day. I'd say there is probably two primary puts and takes that I would highlight there. The first is, we did see obviously, the return of the hurricane affected region towards the latter part of September, the time we were going into the Investor Day, if you remember, it was right in the sort of what, was happening in Florida, and so we took a pretty conservative approach by what that the hurricane related impact. The second, I would say, is actually - a bit of counter to that which is you know, the commercial insurance side, while we're continuing to make progress as continue to go relatively slow, and you heard some of that commentary and prepared remarks that we made. But those were the primary two puts and takes that I comment since the Investor Day.

And you had in the international piece, you had guided towards the lower end that of $16 million to $20 million. It looks like you're going to do better internationally. So why is that the case?

Well, these are still, again this is Joe, early days in many of these markets. Mike, we're obviously very [indiscernible] and what's happening there. But as you heard in the commentary we gave, I think we are pleased with the progress we're making in Japan and in Brazil and in the U.K. and, in particular, during the third quarter in addition to what has been you know, continued strong performance out of the longer-term markets in Australia and Germany.

And then, I want to ask you on inject. You continued to say expect to filing by the end of this year. But it sounds like - just in terms your commentary on when that translates into approval is now kind of shifted towards the end of '18. And I don't want to assume that's because you had the incremental dialogue with the FDA that would make you think that later in the year versus middle of the year. But any reason to think that's going be later versus maybe what you're thinking 3 or 6 months ago?

This is Tom, Mike. So thanks for your question. So what I would say is that as we start to approach the 2018 budget, we give a little bit more granular. We're looking for benchmarks that can be telling of how the FDA treat this PMA submission. The nearest benchmark we have is the CyPass adjudication. We about 9 months, so we're on track as we stated along to submit the final module of iStent inject. If we use that benchmark then plus or minus we expect to be somewhere around that range. So I don't know if it's much of a shift, I think it's just more of our granular take what has been predisposition of the FDA.

Okay. Can you just talk about the competition issue that obviously, you're concerned about short-term? And the overall is that dominate in the cataract surgery space, if they wanted to could give away CyPass doing right now, trial and trained people, if you can give CyPass as far long as they would like. So how do you think about 2018? And what are you seeing at this point from just in this period where they really I just trying to trial and trained surgeons to try use their products, what are you from that gives you an indication just to how the behavior is going to be forward?

Mike. This is Chris. They're basically doing as a key what we expected with the exception of taking a little longer on the free trialing, and that's a function I think of their coverage. Right now, there is 4 coming that, they've one commercial appear covering them and is probably taking longer than they anticipated. So they are giving away product or extending term. So in large part, it's been pretty consistent with what we have felt they would react and respond to what we guided you both in Q2 and at the Investor Day.

So no surprises, no changes there?

I would say that, this is Tom. So we've been pretty consistent all along and what we thought to do just to re-stipulate we have immense respect for the organization and its ability to use muscle and mass in the U.S. and around the world. Having said that, we believe we have the primary product that provides the best benefit to risk for patients in the mild-to-moderate open angle glaucoma. We continue to firmly believe that. As we get our channel checks, you can imagine nobody is more intimate with the community that we are. We believe that the outcome CyPass launch is largely within our expectations.

Your next question comes from line of Robert Hopkins from Bank of America.

Tom, I just want to start with you. I think I saw an 8-K filed for you guys maybe talks about restated change of control provisions for the company. I was just wondering if you could comment on that and why sort of the why now question on that.

Bob, this is Joe. I'll just chip on that So I think this is ordinarily housekeeping price as we go through various planning the board that timing was fly alongside with the documents today, nothing unique there.

Okay. And then on the question 2010, I mean, there is obviously a ton of moving parts here, some of which are obviously very temporary and some will see and then a lot of product launches coming from you guys late in '18 and then '19, '20 and beyond. So '18 is clearly a transition year and I realized give guidance a quarter from now. But preliminarily, it looks like it's probably not going to be a year where there is really frankly any growth. And I was just wondering if you can sort of kind of react to that comment just level set given that it is such a unique year?.

Thanks, Bog. It's Joe. Obviously, as you alluded to in your question, it's premature for us to get anymore granular with respect to 2018. We will obviously give that guidance on our Q4 call early next year. Today, what you heard with an attempted against a little bit more thought and commentary and color around various puts and takes and how we think about them for 2018. But I'll leave it to you for assess what that means in your models for the year.

Okay. And then maybe just on your Q4 guidance, can you give us a sense as to especially in the U.S. the difference in the growth rate in the commercial accounts versus the other 80% of the business?

It is a difficult one to answer, Bob. So obviously, in any account, we're seeing as a mix through the commercial and Medicare-related patient volume. I guess, what I would say is, if you're thinking about the context of maybe putting it in same-store sales terms, right, which we continue to see about a third of our accounts they are growing quite nicely. Not surprisingly those are accounts that are not impacted by either hurricanes or commercial Insurance issues in the like and then growing in the direction we would expect about a third of our accounts are in and around flat, and they may be dealing with some issues are there may be fully penetrate in terms of procedure volumes, perhaps what they're doing. And then about a third are being impacted in some way by the Commercial Insurance issue and/or trying and of competitive products.

Your next question comes from the line of Brian Weinstein from William Blair.

Just to go back onto CyPass for a second. Can you talk, just to be clear about this, where are you seeing the utilization? Can you talk about if you're seeing it head to head with the primarily more on the glaucoma specialist side or with the general surgeons? And then are you hearing about similar complication rate in the field to what they saw in the clinical trial?

Brian. This is Chris. Yes, I would say they started out primarily with glaucoma specialists that is still, I would say, their primary customer. They have started to move into comprehensive ophthalmologists as well. They are, in some cases, experiencing many of the things that were listed in their IDE in terms of complications. But there are people too who are having some success with that. We still feel strongly that trabecular bypass approach is a better approach it's more consistent. There is not much very variability basically the same efficacy and less chance of complications. And for all those reasons, we still feel very good about our product portfolio in our positioning within the marketplace.

Great. And as a follow-up, as it relates to the fee schedule. Now that the fee schedule is published and this number is basically in there for 2 years just help guys in your negotiations or not negotiations but your discussions in trying to get this done I think it would be some sort of accelerate to make the job a little bit easier now that's it's been there for 2 years?

Yes, Brian, I think that's a safe assumption. The final ruling came out very similar to the 2017 ruling. So it was in line with what we expected and this quarter been in place now for 2 years, it certainly can't hurt us and should help us.

Yes, I'll just add. Brian, this is Joe. I think it's like we said in the remarks we don't necessarily get the matter of if these conversions happen, it just a blocking and tackling issue account by account, situation by situation and that is just taking it's time.

Your next question comes from the line of Lawrence Biegelsen from Wells Fargo. Your line is open

I guys, its Adam [ph] thanks for taking the questions. I guess, Tom, I had 1 question on Q3. Can you give us any more visibility into the U.S. performance, how much was unit growth versus price? And I was wondering how the underlying volume growth compared in Q3 versus Q2? And then I had 1 follow-up. Thanks.

Yes, thanks, Adam, this is Joe. I think I can answer that and you'll be able to do the analysis offline ASPs were stable from Q3 and Q2 and from that you can probably do the rest of the analysis on the relative trend.

Okay, that's helpful. Thanks. And then one question on stand-alone. So you recognize you guys are still working from it the Phase III trial design with FDA. I may have missed it, but do know whether that will require 1 or 2 years of follow-up? And then, I guess, just in general, why is the process taking so long?

Yes, Adam, this is Tom. So To answer your questions we're still in negotiations with the FDA. And as I've been kind of consistent all along, we do think that there, and we know there is some underlying deliberation on 1 versus 2 year for that clinical trial. There is also deliberation on whether or not we go with pseudophakic patients or pseudophakic and phakic patients. So this is all kind of coming to a conclusion as we try to seek to liberalize the open angle glaucoma inclusion criteria, which will speed our enrollment in this expanded phase clinical trial. Why is it taking so long? That's probably less a question for me. I think this is endemic in these discussions we are in the frontier of the whole new treatment class for stand-alone procedures, the FDA, by nature, is conservative, there are multiple terms or they go on in these negotiations. And so as we've said from the beginning, we hope to be able to get a protocol available by year-end, and we are committed to doing so.

That's helpful. Thanks, guys.

Our last question comes from the line of Jon Block from Stifel. Your line is open.

Great. Thanks, guys. Good afternoon. And maybe just two questions. Just on the - it seems like a battle is still going on. Is a time period we don't hear anything in other words here 6 or 7 months passed. So just from your experience, is there, hey, the window shut, and we don't think we can prevail here or can this go on for ? And then I've got a quick follow-up.

Well, I think it's the latter, expectations is as we haven't given no guidance or no indication that there will be a successful conclusion. What I will tell you is that we said along there was an early that we are principally the same condition with and after about a year they upgraded significantly the professional fee payment that they have for the iStent. So there is no time course or deadline. This is something that's normal course for Category III code. And I'll tell you that these discussions as I said, therefore, they're largely happening behind the scenes with state medical societies and others that are highly interested in fair payment for the iStent as well as other MIGS procedures, professional fee payments.

Very helpful. I actually I didn't the other one took up to 2 years. That was good color. And then just to shift gears, Joe, I've got to be the guy that I asked you $5 million spread to keep the full year unchanged so that $5 million spread seems wide as you head into 4Q. It seems like in the past you've been $2.2 million or $3 million delta for that particular quarter. So any reasons why $5 million spread with only 1 quarter to go? Is that a competitive thing, is that a market thing, I would just love your overall thoughts there ?

So it's a fair question, John. I think, obviously, if you talk about here in the call we have a fair number of moving parts heading into the quarter and as we evaluate various scenarios in terms of the progress we made on the Commercial Insurance front, the pace in which we recover some of the procedures from the hurricanes as well as the pace the competition gets additional reimbursement and in whatever traction within the market we just felt it's prudent at this point to stick with the $5 million range.

We have one additional question from the line of Matthew O'Brien with Piper Jaffray.

This is Kevin on for Matt today just 1 for me most of my have been answered. I just wanted to dig in on Japan for second. We heard about the headcount at in the quarter just curious at a high-level at any other update there in region? And then kind of number two knowing you don't want to talk too much about next year just how should we think about that geography intermodals for next year either from a cadence perspective or?

Kevin, this is Chris. We remain very excited about Japan. What we've said all along is that from a medtech standpoint, Japan always adopts new technologies a little slower than most and that we were going with the limited launch in 2017, focusing primarily on the glaucoma specialists to ensure that we got there support. And in '17, we would be more of an investment year with the majority - not the majority, but with '18 starting to be a payoff year for us. We have been training a lot of surgeons. We were strictly focused on the glaucoma specialists until this month where we had our first koshykai [ph] training, which is the training project there, which included comprehensive ophthalmologists. So it's very expect it to be, and we look for good returns from Japan in 2018 and beyond.

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

Okay.. So to all investors and analysis, thank you so much for your time today, and it attention and for your continued interest in Glaukos. Thanks, again, and goodbye.