IRIDEX Corporation

Good day and thank you for standing by. Welcome to the Q3 2023 Iridex Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tripp Taylor, Investor Relations.

Thank you, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer, and Fahad Ahmad, Interim Chief Financial Officer. Earlier today, Iridex released financial results for the quarter ended September 30th, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. Any statements made during this call are not statements that are not statements of historical fact, including but not limited to statements concerning our strategic goals and priorities, product development matters, sales trends, and the markets in which we operate. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements. For a discussion of the risks and uncertainties associated with our business, please visit please see the most recent Form 10-K and Form 10-Q filings with the SEC. Euredex disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 14, 2023. And with that, I'll turn the call over to Dave.

Good afternoon. Thanks, Tripp. And thank you all for joining us. Today, I'll discuss recent corporate and Medicare reimbursement developments and our business progress. Then Fuad will provide details on the third quarter financials, and we will open the call for questions. I'll start with the topic I expect people are most interested in learning more about, That's the Medicare coverage policy that was the subject of our recent 8K and the potential impacts to our business. On October 26th, WPS, a Medicare administration contractor, or MAC, was the first to issue an LCD changing its coverage related to minimally invasive glaucoma surgery, or MIGS, procedures. Last week, as expected, four other MACs released similar LCDs, and all will become effective December 24th, 2023. While the clear focus of the five LCDs was MIGS device use, they also changed their coverage criteria for cyclophotocoagulation, or CPC, which is the basis for Iridex's micropulse and continuous wave glaucoma procedures. While MIGS are incisional surgical procedures predominantly done coincident to a cataract surgery, The CPC procedures done with Iridex devices are neither incisional nor are they commonly done coincident to cataract surgery. While the MACs provided little context or explanation for their motive in coverage changes, it's believed they were reacting to the rapid rise in volume and cost of MIGS procedures, particularly driven by multiple MIGS devices deployed during one cataract intervention. This drove an increase in surgeons submitting multiple billing codes and a large increase in reimbursement expense per procedure and in total. The LCDs limit MIGS procedures concomitant with cataract surgery to a single device and specifically call out newer MIGS devices that enable both a canaloplasty and a goniotomy procedure to be performed with a single device. These and several other procedures were labeled as investigational which means they were made ineligible for Medicare reimbursement until more rigorous clinical work on effectiveness is published. The LCDs confirmed that cyclophotocoagulation received continuing payment coverage. Unlike the targeted MIGS procedures, CPC is not labeled as investigational. However, the coverage criteria for CPC was redefined via an extensive list of patient characteristics and symptoms that would effectively limit reimbursement to procedures performed on patients suffering from very advanced stage glaucoma. For our business on patients enrolled in these restricted coverage MACs, this means fewer micropulse TLT procedures and stricter limitations for continuous wave CPC procedures. So how many fewer procedures? Let me run through the numbers to get a sense of what impact the LCDs might have on Iridex's glaucoma revenue. and note there's still a high degree of uncertainty, we believe the following classifications and assumptions represent the situation. First, half of Viridex's glaucoma revenue is international and unaffected. Further, two of the seven total MAC payers in the United States have not issued a change to their cyclophotocoagulation coverage, and these MACs cover about one-third of our U.S. footprint, including key states like Florida, Texas, and Pennsylvania. To be clear, CPC is still covered in all the MACs. The procedure is just now subject to restrictions, narrowing its coverage in five of the seven MACs. So the American Glaucoma Society estimates that approximately 50, sorry, 60% of U.S. glaucoma patients are covered by Medicare. Our procedures are performed on moderate to advanced severity, probably skews a little bit older, so we estimate about 70% of our volume has Medicare coverage. However, within Medicare, about half of patients are covered by these MACs, network of payers, and half are in Medicare Advantage programs, which are administered by traditional insurance companies like Aetna and UnitedHealthcare. Currently, none of the MAC Advantage or Medicare Advantage payors have altered their coverage for CPC, even as they've issued new updates for their MIGS coverage criteria. At this time, Iridex cannot accurately predict the impact these LCD coverage changes will have on its U.S. glaucoma probe or system business. The math implies about 20% of U.S. procedures fall directly under the MAC coverage restrictions, with our glaucoma procedures for the most severe patients least affected and those for more moderate stage being most affected. At this time, it's uncertain how physicians will react to coverage reductions and their decisions to offer our treatment to patients. We've heard many doctors, particularly during the recently held American Academy of Ophthalmology in San Francisco, that CPC is not only proven and effective, but an essential part of their treatment program for controlling the progression of glaucoma for their patients. These physicians communicated their strong intention to continue performing CPC And several doctors discussed the possibility of offering patients for whom CPC is obviously the best next treatment an option for self-pay if coverage isn't available under their plan. Qualitatively, there are two important competing considerations. First is going to be physician confusion and frustration surrounding these reimbursement changes in the affected MAC states. We expect the coverage restrictions will result in many of our potential prospects deferring adoption, pleading to fewer domestic orders for consoles and probes as providers work through the confusion around what has changed and who's affected and how they will position CPC in their practice. In affected MAC regions, doctors may not be aware of an individual patient's coverage and to whom they can offer our procedures and generally pull back usage to avoid non-reimbursed procedures. On the other hand, there are some potential positives for Iridex. Migs are a big deal in the glaucoma community right now, and the LCDs are receiving a lot of attention. And this includes physicians wrestling with their options going forward in treating the disease. Ironically, with the LCDs falling hardest on migs, and thereby almost certainly reducing the number of migs procedures that will be performed, there should be greater need, recognition, and interest in non-incisional alternatives. This is a marketing opportunity that plays right into Iridex's existing positioning and glaucoma. The LCD's effort to reduce the number of MIGS procedures may ultimately trigger the long-term effect of significantly improving the market opportunity for our CPC offerings, both in the US and OUS. Ophthalmologists that have long been caught up in the growing assortment and uptake of MIGS may be more open to Iridex's non-incisional alternative. And beyond working to appeal the LCD coverage restrictions, Iridex will have the opportunity to position itself as a champion for patients, physicians, and pursuing the best medicine. Many clinicians have commented to us that it's a mistake to channel patients toward more advanced surgical procedures too early. It's basic disease management to defer more complicated, higher risk surgeries as late as feasible. On top of that, there are many patients where surgery may not be indicated. This includes older, poorer health candidates, and the younger otherwise healthy individuals for whom a glaucoma surgery in their 40s, 50s, and 60s, it can be complication prone and lifestyle limiting and may also result in decades of more involved and expensive follow-up. We believe we have a strong case to appeal the specifics of the LCDs and we're gaining and gathering support within the physician community. We've submitted the first phase of our appeal. working with several influential physicians, some of whom plan their own letters and reference studies explaining why overly restricting CPC is a mistake. The final LCDs ultimately set the criteria for CPC patient characteristics by partially adopting conclusions from an AAO technology assessment report that is 22 years old. We believe they erred by setting compounding criteria for coverage, resulting in overly narrow patient qualifications. They also erred by only choosing some of the recommendations from that assessment and ignoring others. The conclusion of that assessment by the AAO presented a list of several patient types for which CPC is indicated as appropriate treatment options. The LCDs quoted this list of symptoms and characteristics but replaced the commas between them with the word and, the resulting effect means that to qualify a patient must have all of the characteristics of each listed patient type. This appears clearly wrong. We sent a correction request noting the process errors and seeking rapid adjustment to the definition. We believe this appeal is compelling and should, emphasis on the word should, lead to a relatively speedy correction of the LCDs to lessen this excessive restriction of coverage for CPC. We believe the error of interpretation embodied in the current wording, if uncorrected, will lead to unrecoverable loss of vision in patients who may be denied access because of the erroneous restriction. We urged each MAC administrator to promptly correct this error before the effective date. We're also preparing a subsequent appeal for reconsideration to further broaden the criteria for reimbursement. First, The coverage change did not appear to take into account patient safety. By requiring, a patient must have undergone more invasive, higher complication rates, surgeries like trabeculectomy or tube shunts. By pushing patients into earlier invasive surgeries, greater follow-up management is required. Later life options will be more limited. Basically, if you use up your IOP control tools too early, it can lead to greater loss of vision later in life. Second, the process for considering study evidence was flawed. We have a large body of peer-reviewed clinical studies to support our procedures in a broad range of patient types and severities. This past summer, we submitted to the MACS over 80 published papers on transcleral cyclophotocoagulation, treating over 2,000 patients. It appears their process criteria rejected most of this evidence. Instead, we will seek them to consider the broader body of evidence that supports the safety and efficacy of cyclophotocoagulation. So this leads straight into updating our ongoing clinical programs. As we've discussed prior, we had planned to enroll the first patient by the end of the year in our new prospective multicenter study that will include key opinion leaders as investigators. This release of new clinical criteria within the LCDs will potentially cause a modest delay in the launch as we assess whether our protocol and method are best aligned. But we're nonetheless fortunate to already be well along the road toward producing the clinical data they have stated as required for future reimbursement decision consideration. Having glaucoma physicians rally in support of Iridex CPC at the same time we're finalizing preparation for clinical study on efficacy of CPC specifically targeted to post-mix patients seems very favorable. We'll try to advance our message and market position by capitalizing on the opportunity and attention created by the LCDs. We have confidence the efficacy and safety of our procedures will prevail and the increased clinician awareness generated through this process can provide exposure and positive public relations at a scale we could never have afforded. Let me shift to recent announcements that the board of directors is engaged in a review and evaluation of strategic alternatives that may be available to Iridex to unlock shareholder value. This is an appropriate time for the company to explore options for future of each of our product lines and the company as a whole. Our retina business has achieved a global leadership position in both sales and installed base in ophthalmic laser treatment systems for retina specialists. Over the past 30 years, the company has developed products and has set the clinical and technical standards in the space. Most recently, we launched the new Pascal platform with micropulse capability. In glaucoma, we've been the leading provider of non-incisional transcleral laser treatment beginning 30 years ago with the G-probe, cyclophotocoagulation treatment for later stage glaucoma patients, and more recently with micropulse transcleral laser therapy for moderate to advanced stage glaucoma patients. Since launching MPTLT, we've steadily expanded our market presence to over 2,000 glaucoma laser consoles worldwide and delivered over 250,000 single-use probes. Both our revenue and product offerings are strongest they've ever been. We're progressing through our process, but do not plan to provide commentary or updates along the way until the Board of Directors determines that disclosure is appropriate. Before I turn over to Fuad for a review of the third quarter financials, I'd like to add a couple of items of perspective. The quarter was in line sequentially, which is positive given Q3 is generally seasonally softer than the second quarter. This quarter was tougher year-over-year comparison against a strong third quarter of 2022, especially given the loss from expirations. We expected the announcement of our strategic review might have impacted short-term results, but fortunately we saw a little of this domestically, and it was primarily our distributors that held back orders concerned about appropriate levels of inventory to carry going forward. As a result of the Medicare reimbursement changes, we've suspended our guidance due to the high variability of the U.S. glaucoma situation and how our business may unfold in Q4 and going into 2024. We remain very focused on cash management to remain our operating runway and intend to adjust our glaucoma operations as we evaluate the impact to our business from these reimbursement changes. With that, I'll pass the call over to Fuad to discuss the quarter's financial results.