Welcome to Glaukos Corporation's First Quarter 2019 Financial Results Conference Call. A copy of today's press release issued after the market closed today is available at www.glaukos.com. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] This call is being recorded and an archived replay will be available online on the Investor Relations section at www.glaukos.com. I will now turn the call over to Chris Lewis, Director of Investor Relations and Corporate Strategy and Development.

Thank you and good afternoon. Joining me today are Glaukos' President and CEO, Tom Burns; CFO, Joe Gilliam; and COO, Chris Calcaterra. Following our prepared remarks we'll open the call to questions. To ensure ample time and opportunity to address everyone's questions, we request that you limit yourself to one question and one follow-up. If you still have additional questions, you may get back into the queue. 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 sales, our products, 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 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 risk factors. You'll find these documents in the Investors section of our website at www.glaukos.com. With that, I will turn the call over to our President and CEO, Tom Burns.

Good afternoon, everyone and thank you for joining us. Today Glaukos reported first quarter net sales of $54 million, up 35% versus the year ago quarter. We are also updating our 2019 net sales guidance to $225 million to $230 million versus $220 million to $230 million previously. Joe will discuss our financial results and outlook in more detail later in the call. Fueling our strong start in 2019 was the ongoing U.S. commercial rollout of the iStent inject our next-generation trabecular micro-bypass device where we are delivering on our expectations. Over the first quarter, we continued to execute on our primary commercial focus of converting our iStent customers to iStent inject and remain on track with our previous expectations to largely complete the initial conversion process by mid-2019. Similar to our international experience we are seeing early indications of iStent inject's market-expanding potential in the U.S. as we opportunistically train first-time MIGS surgeons on iStent inject in addition to our primary focus on existing customer conversions. Our emphasis will remain on converting existing iStent implanters through the coming months followed by a gradual shift of our reps back to training new surgeons who have yet to adopt MIGS along with increasing utilization within existing accounts. Overall, we're very pleased with the execution of the iStent inject, commercial rollout along with the initial response to iStent inject by the ophthalmic community. U.S. surgeon feedback and real-world results continue to exceed U.S. pivotal trial results in our estimation marrying our experience in international markets and providing us with continued high confidence in the product's efficacy and favorable safety profile. We've been privileged as the corporate founder to pioneer and validate MIGS therapy as a key component of glaucoma management. Our robust and growing body of clinical literature is unparalleled in the…

Thanks, Tom. As noted earlier, net sales for the first quarter of 2019 were $54 million, a year-over-year increase of 35%. The U.S. represented 82% of our sales in the quarter and international 18%. In the U.S., first quarter 2019 sales were $44.2 million, up 32% from the same period a year ago. U.S. sales in the quarter primarily benefited from continued market growth, the launch of iStent inject and the competitive market developments late in the third quarter of 2018. Outside the U.S. first quarter sales were $9.8 million, an increase of 50% from the same period a year ago or 61% on a constant currency basis. Our international business continued to outperform expectations driven by broad-based growth. Our gross margin in the first quarter was 86.8% versus 85.6% in the same quarter in 2018. First quarter cost of sales, no longer included amortization from a 2013 royalty buyout transaction and gross margins further benefited from elevated iStent inject production levels associated with the U.S. launch and initial inventory build. We continue to expect our gross margins to remain in the mid-80% range going forward. SG&A expenses in the first quarter rose 29% to $34.9 million versus $27.2 million in the year ago quarter. This rise reflects higher personnel and other costs related to the ongoing expansion of our domestic and global infrastructure, investments associated with the iStent inject launch and professional fees associated with legal services and the implementation of global enterprise systems. R&D expenses rose 28% in the first quarter to $13.9 million versus $10.9 million in the same year-ago period. This rise reflects primarily the cost of additional personnel as we expand our pharmaceutical R&D capabilities and within clinical research where in particular the direct costs associated with the iDose trial enrollment continues to increase. We…

All right. Thanks, Joe. So to recap, Glaukos continues to pursue our aspirational mission to transform glaucoma therapy for the much-needed benefit of patients worldwide. Our solid performance to start 2019 gives us confidence in the strength of our strategy. Glaukos is better positioned than ever to deliver on our key objectives and to further our mission. The powerful platforms we are building in sustained pharmaceuticals, micro-scale surgical devices and diagnostics should help us evolve into a hybrid ophthalmic pharma device global leader capable of providing optimized droplets, treatment approaches to effectively manage glaucoma and potentially other ocular diseases. I believe we remain in the early stages of unlocking the company's long-term value potential and I am excited with the opportunities that lie ahead. So with that I'll open the call to questions. Operator?

[Operator Instructions] Your first question comes from the line of Robbie Marcus from JP Morgan. Please go ahead. Your line is open.

Thanks a lot, and congrats on the great quarter.

Thanks, Robbie

Maybe I can start with it seems like you've recaptured a lot of the lost CyPass sales. You put up a great first quarter beat the street by 4-plus million. And I look at the guidance range and I realize it's still first quarter in the year and it's a pretty aggressive move to raise the middle of the range this early in the year. Help us understand why it didn't move higher at the top end of the range and how much is just a prudent position this early in the year versus maybe some of the puts and takes we should be thinking about.

Sure. Hi, Robbie. It's Joe. I'll start. There's obviously a lot embedded in that question. Maybe I'll first start with a little bit about the quarter itself, right? I think the setup for the remainder of the year is that in the first quarter all the key drivers really either met our expectations or did a touch better, right. I think we know most of those at this point, but I'll recap them. Market growth was in line to maybe a touch better than expectations. The CyPass recapture was in line with expectations and what we've discussed previously. The inject conversion activities have been in line. The U.S. pricing has been in line to maybe a touch better than our expectations. And then on the competitive trying and trialing front I think the impact was a little less than expected to be quite candid in Q1. So the reason why I say that is to set-up the context of the full year guidance. I think the reality is we're pleased with the performance in the U.S. year-to-date and we're obviously encouraged by all of those trends. But we continue to expect increasing trying and trialing on the competitive landscape front over the course of the year. So while it was lighter than expected in Q1, it's too early in the process to really adjust our expectation on that front for the remainder of the year.

All right. Understood. And then maybe just as a follow-up you guys did an interesting deal with Santen Shunt during the quarter. Maybe just help us understand how that fits in relative versus infinite, and what the thinking was here and how we think about the sales potential and P&L impact to you. Thanks.

Yes, Robbie, this is Tom. I'll take the first part of your question. So we're delighted that we were able to consummate this deal with Santen. I think what the MicroShunt does is really put a capstone to our full algorithm for the treatment of open-angle glaucoma really from the earlier manifestation all the way through refractory glaucoma. So if we're looking at one missing component, it was really for those late-stage glaucoma patients that become candidates for trabeculectomy late-stage filtration procedures or Aqueous shunts. So the MicroShunt gives us really a very strong and meaningful opportunity to provide a compelling alternative for those patients. If you look at some of the data and I'm sure some of you just have. This was just presented at ASCRS. But two-year data are showing pressure reductions of about 9 millimeters of mercury down to 13 or so post-operative mean IOPs with reduction of meds from 2.2 down to 0.5. This is a safe and effective AV external procedure, which complements our existing portfolio. I think even though some of the claims in the iStent infinite if it's approved may overlap, I believe the iStent infinite is going to be used a little bit upstream where surgeons will look for the use of it in patients where they have maximally tolerated medical therapy and they can use the trabecular bypass approach in opening up conventional outflow to achieve the target pressures they seek. But when they're seeing these late-stage patients with truly progressive glaucoma, they're going to turn to the Santen device. And we again are delighted to have it in our portfolio. I think it gives us additional mindshare too with the glaucoma community, which we certainly will look to leverage with our full product line as we move forward in the future. Joe did you have any comments?

Well -- and then from a financial perspective, obviously, we can't say much more at this time, right? I think from -- if I look at it overall from a market opportunity standpoint, many of you know there's about 125,000 tube and trab procedures done annually in the U.S. How that will translate into the opportunity for us in 2020 and beyond, we'll come back to as we get a little bit closer and have more certainty on the launch timing of the product.

Great. Thanks a lot.

Your next question comes from the line Lawrence Biegelsen from Wells Fargo. Please go ahead. Your line is open.

Good afternoon, guys. Thanks for the taking the question. One on international, one on Supra. So the U.K. reimbursement cuts, I heard in the prepared remarks, went into effect in late March. I know it's only been about a month. But what type of early impact have you seen on volumes there? And it looks like you're guiding to basically flat to maybe even slightly down sequentially for the remainder of 2019. So any color there would be helpful and I have one follow-up.

Hey, Larry, it's Chris and I'll handle the first part. In terms of early impact, it's really too early to tell. This just went into effect in April. There's been a number of holidays in the U.K. And so it's been too early to assess the impact. But it will have one. The overall payment went down about 40%. And so, we're dealing with that. We have strategies in place, but there will be an impact in the U.K.

And then adding to that, Larry, I think, from a guidance perspective, it really is entirely the U.K. I mean, the fact of the matter is that we had broad-based growth and the international markets remain strong and robust. But given where we're standing right now, I think, we have to take a fairly cautious view of what will occur in the U.K. in the months ahead. It is one of our top international markets and it's been growing quite rapidly since we launched iStent inject there in late 2017.

That's very helpful. Thanks. And then on Supra, I heard the prepared remarks on that. Maybe a little bit more color on the review of the data, any early feedback you can share from your discussions with FDA. I'm trying to just understand if there's a path forward here, where you could market that product for moderate -- with a moderate to severe label. Thanks for taking the questions.

Yes, Larry. Thanks so much. This is Tom. So you can imagine we are closely monitoring the changing dynamics within the suprachoroidal space. And you can also imagine how markedly that space has changed since the Tier 1 recall of the CyPass device. So we're very much monitoring that closely. And as I've said before, we expect a higher bar from the FDA going into these discussions of a PMA review. And so, I think, that will be certain. And frankly, I think, we'll have our own high bar to meet, because we have established really a pristine, I think, reputation for highly safe and effective products. And we'll want to make sure, once we see the data here that it measures up to our own thresholds and standards as we move forward. And so, I think, it's prudent and incumbent upon me, as CEO, to do that and I will do so. So we'll be evaluating it. The data, as you know, we finished the study on time in March and we're cleaning the data as we speak. And over the next several weeks, we expect to data lock the data and then we'll assess and decide how we move forward. But I will say this. One of the things I'm very encouraged about is, since the recall of CyPass, as we've said before, most of those patients we believe have already converted over to iStent inject. So, I think, we're in a powerful position moving forward.

Thanks for taking the questions guys.

Thanks, Larry.

Your next question comes from the line of Bob Hopkins from Bank of America. Please go ahead. Your line is open.

Hi. Thank you and good afternoon. Just a couple of quick clarifying questions, if okay. First, you mentioned that market growth was a little bit better than you expected in Q1. I was just wondering if you could put a finer point on that. Does that mean, you think the market maybe grew closer to 20% than the 15% you've called for, for the full year? Is that a fair way to think about it?

I wouldn’t -- Bob, it's Joe. I wouldn't go quite that far. What I would say is, we called for mid-teens market growth, right? And what I said was, it was in line to a touch better. So, I think, the way to think about that is, it's probably in that -- and that's for the year, right? So for the first quarter, I wouldn't go quite as far as you just suggested on the market growth.

Okay. That's helpful, though. And then the second question is, just a kind of a clarification on upcoming milestones from a data perspective. Just wanted to know if there's any changes or if you could give us a quick update on, for example, the next dataset for MicroShunt and the next dataset for any of the iDose trials that are going on. I'm just curious if there's any timeline shifts there and what we should expect over the course of the next 12 months on those fronts.

Yes, happy to take that, Bob. So on MicroShunt, the PMA, as you know, Santen has said that they expect to file that this year and are anticipating approval in 2020. They will control the release of any data, so I won't speak for them. But with regards to iDose, again, I think, last year we presented a really fulsome dataset of that -- of our interim cohort analysis of the Phase 2b trial. I feel very comfortable that we validated the early promising data in that trial. We'll be following those patients for three years and really the most important thing is obviously how we're doing in Phase III moving forward. I think we'll assess from time to time whether or not we give any further data reviews for iDose. But I do want to be contemplative of competition which is in this space and to the respect that I can husband the data and preserve some of the autonomy as we move forward and protect some of the proprietary results we're seeing, I will do that. So, right now, there is no change in our position, but we'll keep you informed as we go forward.

Perfect. Thanks very much.

Your next question comes from the line of Matthew O'Brien from Piper Jaffray. Please go ahead. Your line is open.

Well, thanks so much for taking the question. Just as we -- there's a lot of moving parts here with what's going on internationally and then with the domestic benefit that you're getting from CyPass coming off the market. So Joe, can you just help us a little bit with the cadence? I know you don't give quarterly guidance. But is it fair to think that there was a lot of procedures done in the U.K. in Q1 in front of the reimbursement potential change and now it's place and we could see the international business kind of move lower here in Q2 and start to build back up as other territories kind of offset some of the pressure there? And then kind of same question goes for CyPass coming off the market in the U.S.

Sure. Hey, Matt, it's Joe. Let me first start with international since you asked it in that order. From a seasonality and quarterly cadence perspective internationally, I mean, you can imagine it's still a little early for us in the international expansion to call the trend line there. So far and historically what we've seen has been a sequential step-up in Q1 followed by somewhat a relatively flat sequentially into Q2 with then growth from there in Q3 and Q4, right? I say that full well knowing that over time we do expect to see some seasonality from the late summer and winter holidays slowdowns that are experienced in many of the O-U.S. markets in particular in Europe. When you think about the U.K., I think actually the way you said is a relatively fair way of thinking about it. So, clearly, we would expect some impact in the U.K. over the course of April/May/June and for the remainder of the year. And it will take a little bit of time for the other markets to make up for that, if you will, as they continue to grow robustly. I think that's a fair way of thinking about it, Matt, on the international side. On the U.S. front, we've always said cataract volumes are roughly 22% in the first quarter, 25% in Q2 and Q3 and 28% in Q4. Our U.S. Q1 performance was about 23% of the mid-point guidance. And I think the slight difference there can be entirely related to the fact that we had really a shift in our expectations with respect to the competitive trying and trialing. It was lighter than expected obviously in the first quarter. So, the Q1 contribution to the overall year increased slightly.

Okay. Helpful. And then along those lines you know a two-part question on Ivantis one of which I guess you probably won't answer. But I know they're going slow as far as their training and everything and working with docs. But have you seen some cases where you've gone head-to-head with them and the doctors decide to go with them or they decide to go with you any kind of anecdotal commentary on that? And then is there -- are we going to get some kind of -- and this is getting a lot of attention among investors -- but some kind of update or movement on the Ivantis litigation here in 2019? You don't have to give us your legal strategy, just any kind of update that we should expect this year.

Hey, Matt, this is Chris. I'll address the first part of that. And largely things are going as expected with the exception that the trying and trialing was a bit less in the first quarter than we had anticipated. Where we have been in competition with them mostly in line with what we've expected. The performance from an IOP reduction standpoint is similar to ours. We are winning many of those battles, but there's a lot of people who are interested in trying it. They, as we have indicated before, have had -- it's a bit more difficult to insert. And they've been focusing primarily on the glaucoma specialist segment where that segment is perhaps a bit more tolerant of the safety issues associated with the device, in particular PAS. So they've certainly won some. But this is just the beginning of the battle, beginning of the war and we're confident in our position with our safety profile or efficacy and our ease-of-use.

Okay. And then on the litigation front, most of the litigation continues on track. Again, as I've said before, this year will be filled with depositions and claim construction as both sides prepare going forward. A couple of key updates though. As you know we filed a motion late 2018, seeking an early summary judgment of non-infringement on the patents Ivantis has asserted in the litigation. So, in March of 2019 the court granted our motion and found that we do not infringe the patents and thus those patents that Ivantis sought to assert against us are no longer part of the litigation. So that's one key update. The second key update is that the trial, which was scheduled for February of 2020 has now been moved to July of 2020. So those are two key updates to the litigation.

Thanks so much.

Thanks, Matt.

Your next question comes from the line of Jonathan Block from Stifel. Please go ahead. Your line is open.

Hey, great. Thanks guys. Good afternoon. Chris, this one might be for you and admittedly it might be difficult to tease out. But can you position how utilization increases at a practice once it converts to inject? And so I know there's moving parts. Clearly there is underlying growth in the practice as is. But what additive bulk do you see upon inject due to call it ease-of-use or better-bang-for-the-buck with IOP reduction?

Well, to get to a specific number would be difficult to get at. But in many cases what we're seeing is doctors are more comfortable implanting this device, and therefore, more agreeable to utilizing it in surgery and using it on more patients. As they get more comfortable with it and see the positive efficacy, value proposition, the ability to use it on more patients and the safety profile, they're just scheduling more patients. And that's anecdotal. It doesn't happen in all cases and people are in different phases of that continuum. But as a general rule and we've seen this internationally as well as they become more comfortable with this product their utilization tends to go up.

Yeah, and I just would add I think with two stents, obviously, that expands the addressable patient population as they think about that. I think as you said Jon into the more moderate patient population.

Understood. Okay, and then Joe I'll stick with you on the follow-up. The midpoint for the guide comes up by call it $2 million to $3 million. Is there a way to give us a little bit more granularity or parse it out? In other words what's attributable to maybe the call it slower than expected Ivantis ramp? What would be specific to international or U.S. or price? Any details that you can give there? Thanks guys.

Yeah, Jon. That's fair. I mean I'll go back a little bit to kind of where the call started. I would say this was a fairly from a trend perspective and what led to the change it was pretty broad-based, right? I mean I think as I've said, virtually all the key drivers either met our expectations or did a touch better, right. So the market appears to be growing a little bit faster than we would have assumed at this point of the year. CyPass recapture is in line. The inject conversion is going in line with expectations. The U.S. pricing dynamic is a touch better than perhaps we were expecting coming into the year. And then as I mentioned, the competitive trialing and trying impact was certainly less. But it's across the board, all of those drivers leading up to kind of where we're at today and our thoughts on the revised guidance.

Okay. Fair enough. Thank you.

Your next question comes from the line of Chris Cooley from Stephens. Please go ahead. Your line is open. Mr. Cooley from Stephens, your line is open. Your next question comes from the line of Ravi Misra from Berenberg Capital. Please go ahead. Your line is open.

Hi, thank you for taking the question. So just one on the pipeline and then I'll have a follow-up -- sorry --on the MicroShunt transaction partnership. Santen has I think in the past presentations alluded to something like a $200 million revenue opportunity for that device just thinking about how you guys would frame that? And then on the partnership itself, is there any kind of strategic or tactical kind of thing that we're not thinking about here with their pharmaceutical pipeline as it would come with iDose?

Hi, Ravi, it's Joe. I'll start that answer. I think they have commented $200 million in the past I think early on in their acquisition of the MicroShunt device. I would go back to the fact that there's about 125,000 annual procedures done in the U.S. a year, right, of tubes and trabs that really represent the addressable market here, right. And we think this has the potential for being the gold standard in that marketplace and in capturing a decent chunk of that over time. But I can't translate that into the $200 million figure sitting here today.

And Ravi just on the question with respect to whether this has strategic implications what I would tell you is that what Santen I believe did and what they've stated is, they sought out the best partner that they thought could conceivably carry this product forward, and have the maximum impact in the United States. And we were fortunate that they chose us to do that. There is no further strategic implications other than the fact that if we become trusted partners there is always the potential, right for some additional things that we can do together. And so you can imagine we'll be looking to become that partner in the future.

Great, thank you. And then maybe just one on gross margins coming to 87% probably best-in-class amongst public companies and you're guiding to mid-80s. Just remind us again why the rest of the year should be somewhat lower than the first quarter? Thank you.

Sure, Ravi. It's Joe. So the first quarter had a couple things going on. One is sustainable and that is the removal of amortization associated with the acquisition of several patents. Is that represents about an $875,000 a quarter benefit. It was 1.5% in the first quarter. That's sustainable going forward. The other thing that was a positive in the first quarter from a gross margin perspective is that we were very efficient on the operations side. As you can imagine given the launch of iStent inject, both meeting that demand as well as building the initial inventory levels means that the production downstairs here at Glaukos was running quite efficient. But having said that, over time the cost of goods sold associated with inject is a bit higher than iStent and you combine that with the fact that the international markets operate at a slightly lower gross margin and that's what lands us at that sort of mid-80s gross margin going forward.

Your next question comes from the line of Ryan Zimmerman from BTIG. Please go ahead. Your line is open.

Great. Thanks for taking the question. Congrats on a quarter. So, Tom we were at ASCRS this weekend too and in our survey works seems like you're through a lot of the iStent inject conversion. I was just wondering, if you could maybe talk a little bit about the salesforce relative to your expectations in terms of switching back to offense. I hear what you're saying around kind of midyear this year. But are there territories maybe geographically speaking where you can potentially switch back to new doctor acquisitions, or is it more broad-based in terms of your expectations around iStent inject? And then I have a follow-up on iDose. Thank you.

Hey, Ryan this is Chris. I'm going to handle the first part. And what we've said is that, we should be the majority of the way through that conversion of iStent to iStent inject by midyear. And that is yes, broadly speaking there are territories that are ahead of that and maybe a little bit behind that. So that's just an average. We've been opportunistic as well in terms of adding new customers along the way. But we will go completely on offense sometime in the second half of the year. And we're right on schedule to where we had told the Street that we would be at this time.

Fair enough. And then my second question around iDose just given some of the dynamics we've seen around branded pharmaceuticals and their pricing that have come into the market recently particularly in the glaucoma market, has that changed your view at all in terms of the pricing strategy related to iDose now? Warranting that you haven't spoken much about pricing on iDose. But given what we're seeing has there been any change in how you think about potentially pricing that product when it does potentially come to market? Thank you.

Yeah, Ryan for sure. And I think you said it yourself. We haven't mentioned any pricing strategy. And you can imagine we're in the early and embryonic kind of HT analysis by country to kind of figure out where we can be that will provide a fair price and really be able to optimize the commercial value of the product. When you talk about generics, I think it's a whole different class. And so if I'm talking about topical medications that are used, many retrospective and prospective studies have about showing usage about 25% of the time sometimes up to about 50%. Non-adherence rates that can range from anywhere from 50% to 75% or more percent with even a single application a day, I don't get entirely troubled by trying to price versus a generic. I think they're two different species. I think we will, if we are successful be really the first sustained delivery system that will carry out as far as we believe we're going to be able to go. And so I am one, extremely optimistic. Two, I think we'll have pricing flexibility moving forward. I think we'll be responsible and prudent like we've been with our other products figuring out how this will best -- how pricing will best affect the adoption and commercialization of the product. And as we get there and in time, we'll be able to disclose that to you.

Appreciate it. Thank you for taking the question.

You’re welcome.

And there are no further questions at this time. I will now turn the call back to Glaukos for closing remarks.

All right. So thank you all for your time and attention today, and especially for your continued interest in Glaukos. Thanks and good-bye.

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