Tim Goodnow - President, Chief Executive Officer Nick Tressler - Chief Financial Officer Mukul Jain - Chief Operating Officer Mirasol Panlilio - Vice President, General Manager of Global Commercial Operations Lynn Lewis - Investor Relations, The Gilmartin Group

Good afternoon and welcome to Senseonics Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Lynn Lewis, Investor Relations. Please, go ahead.

Thank you very much and welcome to the Senseonics second quarter 2020 earnings call. This is Lynn Lewis from the Gilmartin Group. Before we begin today, let me remind you that the company's remarks include forward-looking statements. These statements reflect management's expectations about future events, operating plans, regulatory matters, product enhancements, company performance and other matters and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. A list of the factors that could cause actual results to be materially different from those expressed or implied by any of these forward-looking statements is detailed under risk factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019, our 10-Q for the quarter ended June 30, 2020 and our other reports filed with the SEC. These documents are available in the Investor Relations section of our website at www.senseonics.com. We undertake no obligation to update publicly or revise these forward-looking statements for any reason, except as required by law. Also, on this call we will be discussing our 2020 outlook. In light of the COVID-19 pandemic, 2020 financial guidance was suspended on March 26, 2020. On this call we will be providing investors U.S. GAAP net revenues and gross revenue measures to provide meaningful supplemental information regarding our performance and provide better transparency on the impact of reimbursement in the Eversense Bridge program. In accordance with U.S. GAAP, Senseonics reports revenue in its financial statements on a net basis, which includes gross to net reductions, primarily related to the Eversense Bridge program. Gross revenue measures do not reflect the gross to net reductions and accordingly may be considered to be non-GAAP financial measures. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with U.S. GAAP and Senseonics non-GAAP measures may be different from non-GAAP measures used by other companies. For more information on these non-GAAP financial measures, please see the reconciliation of these non-GAAP financial measures to their nearest comparable GAAP measures in this afternoon's earnings release, which is available on our corporate website at senseonics.com. Joining me from Senseonics are Tim Goodnow, President and Chief Executive Officer; and Nick Tressler, Chief Financial Officer. With that, I’d like to turn the call over to Tim Goodnow, President and CEO. Tim.

Thank you, Lynn and thank you all for joining us. Before we begin today, I'd like to offer our thoughts to everyone that has been affected by the wide reaching impacts of this public health crisis, including the economic hardships experienced across our communities. As an organization the health and safety of our employees and their families our top priority. We have taken every precaution to ensure a safe work environment and will continue to be diligent for our efforts to limit infection risks across our community. This afternoon, in addition to our second quarter financial results, we have exciting news to share regarding the future advancement of Senseonics. Our efforts exploring strategic alternatives to increase stakeholder value have culminated in agreements with Ascensia Diabetes Care that were announced earlier today. Together, we have entered into a collaboration and commercialization agreement with Ascensia, concurrent with the financing arrangement with PHC, the parent company of Ascensia, a KKR portfolio company, as well as an additional financing agreement with Masters Special Situations, an affiliates of Masters Capital Management. The focus of our call will be on the details of these agreements and what it means for Senseonics moving forward. We feel this is an ideal result for our shareholders, users, healthcare providers, payers, the company and our partners towards ensuring patient access to the only long term, CGM on the market. The partnership with Ascensia is designed to combine the strength and leverage the complementary competencies of each organization through a highly collaborative relationship. The agreement is structured to align incentives for mutual benefits through penetration of the CGM market with our current and future Eversense products. To start, we think it would be helpful to provide some background on our partner to frame why this is such an exciting opportunity. Ascensia…

Thank you, Tim, and good afternoon everyone. First off, I would like to provide more color on how the Ascensia agreements change our financial profile moving forward. As we had previously announced, we created – we ceased operations targeting new commercial patients in the U.S., to improve our cost structure and address the reality of the COVID environment. With Ascensia assuming commercial responsibilities and the related expenses, starting in Q4 of 2020 and in 2021 we expect the sales and marketing spend for Senseonics will be significantly reduced on a full year basis when compared to prior historical levels. This accelerates our breakeven point and reduces cash needed to access patients in the U.S. and the EU market place, while allowing the company to focus on our core competencies in R&D, product development, clinical trials and regulatory, along with manufacturing and quality. The initial $35 million funding from Ascensia will be generated by the issuance of Senior Secured Convertible Notes to Ascensia at a 9.5% interest rate decreasing to 8% following the PMA approval of the 180 day product, with a maturity date of October 31, 2024. A portion of the proceeds will be used to repay the Highbridge first lien term loan balance, including the discounted prepayment premium. The remainder will be used to fund continuing operations, including supporting the current Eversense installed base and product development initiatives. Following the PMA approval of a 180 day product and receipt of any required shareholder approval, required by the NYSE American listing notes, we will also be eligible to issue $50 million of convertible preferred equity to Ascensia, which will further strengthen the balance sheet. We further improved our liquidity position with additional financing through the entry of a stock purchase agreement with Masters Special Situations an affiliate of Masters Capital…

Great! Thank you, Nick. To conclude, overall we are extremely excited about the positive outcome of the strategic process and the opportunity ahead for Senseonics and Ascensia. With the announcement of these transactions, we have concluded the strategic review that we had announced in March and we're looking forward to the opportunity to drive shareholder value. We are creating a partnership, the world class organization Ascensia. It was also focused on providing patients with advanced diabetes management technology. Combining the strengths of our organization, this will offers significant value to all shareholders. As well patients, physicians and payers will benefit from the collaboration with increased resources dedicated to driving adoption of the Eversense technology. We are proud to partner with Ascensia who has shown through their actions and equally strong long term commitment to our life changing technology. Again, I would like to say thank you to all of you and importantly to all of our employees who have shown tremendous dedication and drive amid these challenging circumstances, both internally and externally. We look forward to providing you with updates in the future. Joining us for questions are Mukul Jain our Chief Operating Officer and Mirasol Panlilio, Vice President and General Manager of Global Commercial Operations. Operator, lets now open up the call for questions.

[Operator Instructions]. Our first question today, comes from Matthew Blackman with Stifel.

Good afternoon everyone and congratulations; a lot of positive updates today. Maybe Tim if I could start with you, you gave us a little bit of color on Ascensia’s selling footprint. I think you mentioned starting out with 30 reps, ramping to 80 over some period of time. First of all, I assume that’s just a U.S. number. Is there any way to sort of also talk about the selling footprint outside the U.S. and again I know probably a tough questions ask you, but is there any way to sort of think about what Ascensia current BGM user bases is and I've got a couple of follow-ups for Nick. Thanks.

Yeah, thanks Matt; pleasure to speak. Yes, those numbers specifically are dedicated to Eversense sales personnel, sales professionals’ not including sales management or other supportive folks for the U.S. sales efforts. Outside the United States, obviously Ascensia is a very significant organization in glucose monitoring, especially outside the United States. They have a very significant position in the U.S., but even larger outside the United States and as such that's one of the reasons that they're such a great partner for us. We are still in the process of really defining what are the best joint opportunities for two organizations. So I don't have all the details, but we do know that beginning in the first quarter of 2021, the European opportunity will be significant in the initial countries that I mentioned and we fully anticipate working with Ascensia to expand beyond that.

Okay, appreciate that. And then Nick, a couple for you. I know you're not giving guidance and I appreciate that, but is sort of the run rate we are seeing now on revenues in particular, the way we should be thinking about the run rate until, you know sometime in the first half of next year when everything sort of restart again. Just any help as we think about the next couple of quarters as we try to build our models. And then the last questions you Nick. You brought it up, so I'm going to ask. You mentioned accelerating sort of the breakeven threshold. Again, probably not fair to ask at this point, but how should we be thinking about sort of the new profitability framework for Senseonics. Is there a revenue run rate threshold for possibility we should be contemplating. Just any help to, you know I guess in these early days to sort of think about how this might play out over the next several years? And I'll hop back in queue. Thank you.

Yeah, I appreciate those questions Matt. For revenue I’ll start there and say obvious as we mentioned in our opening comments, given COVID, given the uncertainty of the environment here in 2020, we are suspending any revenue guidance for this year. Certainly we provided some color of what we looked to achieve with our partner here for the remainder of the year, our new partner. In your second question on breakeven, again at this time we're not looking to provide any long range guidance of what that would look like, but certainly we're very excited about how from a P&L perspective as Tim mentioned in his comments, that our P&L will be improved with a much lower sales and marketing investment in OpEx moving forward. Tim, any comments to add.

No, I think you covered it. Obviously we are excited, we have given the COVID dynamic and the financial situation of Senseonics with the Solar debt. We are excited that we are able to now begin the process of commercialization again. We do have a number of doctors and patients that have reached out to us, that we have not been able to serve, so we're excited about serving that backlog. We're also very excited about the opportunity to serve the Medicare population. This is especially important, especially in a time of COVID, to be able to have a long term monitor and to be able to do it with, you know now coverage from Medicare for that population is very exciting for. So we're going to look to expanding those conversations and roles with Ascensia and really jumping back in right here in the third quarter and fourth quarter with that Ascensia partnership for U.S. commercialization again.

Thank you. I appreciate it.

Our next question comes from Danielle Antalffy with SVB Leerink.

Hi, good afternoon Tim and Nick and team. Thanks so much for taking the question and many congrats on this deal. It sounds fantastic, so nice work there. I guess Tim just a quick question on Ascensia and sort of how – you know what they'll be able to do differently besides the obvious, which is the footprint and the presence in the physician's offices. I guess I felt like some of the issues were around reimbursement, a lot of utilization of the bridge program, previously. So maybe talk a little bit about what has changed fundamentally other than the breadth of reps in the physician's offices that will now elevate the status of Eversense in the U.S.?

Sure Danielle and thanks. Obviously you hit on a couple of key ones, right. The reimbursement position for Eversense just continues to grow and get better and better. Even the physician fee schedule that was proposed by CMS last week is honestly really a big deal. It's not typically talked about in the CGM space, because the other products frankly are DME’s, right. They are Durable, Medical and they go through a different channel. But the opportunity to have this as a medical benefit, without some of that encumbrance for a large population of patients is very significant and obvious we are going to work hard with Ascensia to really get that implemented as quickly as possible. So that's clearly one of the big changes as you've seen, even though we've had to scale back commercial activities in the last quarter plus the reimbursement activities continue to make progress on the commercial side as well. You know, just a week or so ago we did get notification that additional Blue’s plants, many Blue’s plants will be coming up and going live and Highmark being one of the biggest ones. So it's great to see progress in that space as well. And then in addition, obviously Danielle the biggest change of course is really to be able to use the infrastructure and capability, the buying power, when you talk about marketing programs, Ascensia really has a deep and capable global commercial organization and as we were at being Senseonics on our own, attacking the U.S., obviously you're doing that from a from a much smaller base. Ascensia has over 1,700 employees, right, a broad global position. 10 million patients that they talk to on a daily basis, so that they talk to, not on a daily basis for all 10 million certainly, but a lot of depth of experience. Remember, they are the original BGM folks. So they know it extremely well, they know the space incredibly well and you know they're just going to bring a lot of depth to us in not only commercial operations, their partnerships with distributors, their infrastructure to move product around. We should certainly be able to leverage, we've had conversations with, as well as our U.S. distribution partners that they actually have a much stronger relationship. So there's a whole lot that we can leverage and really instead of bifurcating the global opportunity like we had done in the past, having that under one umbrella with a global partner I think is going to bring a lot of value to us jointly.

Got it. That’s makes a ton of sense. And then Nick, maybe this one for you and I'm sorry if I missed it, but I just want to make sure I understand what this means from a revenue recognition and also mark in perspective for Senseonics. Can you give a little bit more color as we think about our models. Should we be thinking about the same ASP, what’s going to Ascensia and how does that impact margins. Thanks so much.

Sure, yeah happy Danielle. I would describe it that our commercial agreement is that there will be a revenue sharing piece and Ascensia will receive a portion of the net revenue and that's going to be at specified tired percentages and that changes as the revenues grow. So Ascensia’s portion will grow as the revenue grows. And we provide a little bit more additional color in our 8-K in terms of disclosures, but we talk about the specified tired percentages that they are going to range from, for Ascensia approximately the mid-teens to the mid-40s and that's based on levels across the global net revenue. And again, we’ve got some additional disclosures that obviously we provide into our 8-K, but the modeling then will be based on those tiers, which we won't necessarily disclose, but we certainly look forward to providing revenue guidance at the appropriate time based on obviously the collaborative work with our partners. In terms of margins, really the biggest to mention there for margin improvement over 2021 and beyond is the switch from the 90 day product in the U.S. to the 180-day product. We're not prepared to talk about pricing or any of those types of mechanics. But certainly see expansion there, as well as other operational levers to continue to improve those gross margins.

Thank you so much.

You're welcome.

Our next question comes from Alex Nowak with Craig-Hallum Capital Group.

Great! Good afternoon everyone. This is actually [inaudible] on for Alex. Thanks for taking our questions and you know apologies if this was already addressed. We are jumping between a couple calls here, but could you provide us with the general sense of what the ongoing level of operating expenses is with the deal, and whether you have any levers that you can use to slow the burn more? Thanks.

Sure, I'll go ahead and take that. In our prepared remarks where we talked about that for the second half of 2020, we expect the operational cash burn to be in the $3.5 million to $4.5 million on average per month. Obviously that's down significantly from what we were operating in 2019 and in the first quarter of 2020. For 2021, based on current projections we expect the operational cash burn to be below $60 million for the full year of 2021.

Got it. Okay, I appreciate that.

You’re welcome.

And then just second one for me, you know just given the COVID dynamics, do you mind commenting more broadly on what you're seeing out in the field today and do you sense that endocrinologist are less hesitant to do new implants now and that the opportunity is you know continuing to open up in Q3?

Tim, would you like to take that one?

Pardon me ladies and gentlemen, it does look like we might have lost Tim’s like. So if you'll just hang on a moment we'll try to reconnect.

Hey, well its Mirasol Panlilio. Let me take that on, while we try to get Tim back on line. We are seeing the insertion increase particularity in Europe. We certainly saw a dip come March and April timeframe, but in Europe as in the U.S., we’ve steadily seen it really stabilize. So we expect that that will continue, but with COVID and some other countries still experiencing either regional or local level, you know some shut downs, it's a little hard for us to predict, but we've been very pleased how stabilized it has been in the last couple of months, particularly in Europe.

Great! I appreciate all the detail there and congrats on the positive developments.

Sure.

Pardon me everyone. I have Tim to rejoin and we’ll go ahead and take a question from Marie Thibault.

Hi folks, can you hear me?

We can hear you Tim.

Okay, I apologize for that. I don’t know what happened. I got cut out.

Thank you. Yeah I wanted to ask one question here on sort of how we should be thinking very high level about this partnership. I know Ascensia has had partnerships in the past, I believe with a company called POCTech to market a CGM, I believe in parts of Europe and Asia. So I wanted to get kind of a high level idea of the trajectory as you think over the next couple years. Does this partnership kind of put you ahead of where you would have been on your own in 2019 if insurance coverage hadn’t been a bit of a stumbling block. How can we think about this generally? I know you can't give guidance at this point.

Yeah, but it is a good point Marie. We obviously think that this is a great advantage for us with the depth of commercial resources that Ascensia brings to the table for sure. You know especially in the U.S., the largest market, the biggest opportunity. I would – you know in regards to the POCTech product, we certainly are aware of it. It's been a very – you know an open part of our communication. It was a technology that Ascensia does have a partnership with. However, it's in a different place in the market and we do expect it to be certainly geographically differentiated as well. So we don't expect that there will – certainly in the short term horizon, certainly be any overlap and obviously the commercial focus that we referred to is dedicated just to the Eversense products. So as you know, the Eversense is quite a bit further with already having PMA approval in regards to scale-up and regulatory and the like.

Great! Perfect, and then I guess my follow-up would be as we look ahead to the 180 day product, is there anything that needs to be done on the insurance coverage side or is that really just sort of a supplementary update that all the commercial payers would kind of put out once the 180 day is FDA approved? Thank you.

Yeah its certainly something that we talked to the commercial payers about. You know remember one of their big advantages is the expense of insertion and removal is cut in half. So there's certainly a motivation to do that and do recall the history in the space. We have started out with three, then five, then seven and 10, and now 14 days in the transcutaneous sensors. So many of the payers have gotten used to a per day payment scheme. So we haven't received push back as of yet but we do expect it will be approaching them, probably in the fourth quarter of this year and letting them know where we are in the new transition to new products. So there is communication that's required, but we don't see it as being a major issue. Just as you've seen, it really hasn't been a major issue when some of the other products have gone from seven to 10 to 14 days.

Makes a lot of sense. Thank you and congrats!

This concludes our question-and-answer session and I would like to turn the call back over to Tim Goodnow for any closing remarks.

Well great, I want to thank everyone for the opportunity this afternoon to speak. We're very excited about the news and the partnership with Ascensia and we certainly look forward to updating you as it evolves on future quarterly call so. So with that we'll go ahead and conclude and again, thank everyone for their participation today. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.