“Our core product areas of knee and hip surgery are being impacted in unprecedented ways by COVID-19,” said Mark Augusti, president and CEO. “As the virus spreads around the world and our customers—the hospitals and their professionals who do incredible work—battle against the virus, demand for arthroplasty has dropped significantly. When combined with patients’ desire to self-isolate, we have seen a significant reduction in elective surgeries, including an almost complete shutdown of elective arthroplasty in many major cities across Europe and the United States. We are working tirelessly to take care of our Conformis team, our customers, and our patients. The situation is changing by the day and there is still tremendous uncertainty, but we feel it is important to share an update on some of what we have seen to date and describe key actions we have taken to mitigate the impact of COVID-19. While at this time we cannot predict how long this crisis will last, we know that eventually it will end. And when it does, we aim to be prepared to serve our customers and patients as we have in the past. We have the expertise and what we believe is a unique and efficient delivery model for knee and hip arthroplasty. Because our delivery model does not rely on limited numbers of instrument sets like many of our competitors’ models do, we also believe that this delivery model will be ideal for surgeons looking to work efficiently through the backlog of cases that will only build as the pandemic continues to delay elective surgeries.”
Business Performance Update
As a result of the various macroeconomic factors at play as a result of the COVID-19 pandemic, the company is withdrawing the 2020 revenue guidance it announced on March 2. This is disappointing because 2020 had gotten off to a solid start. While these estimates are no longer accurate or reliable, as of March 12, 2020, its best leading estimates indicated that for Q1 2020 Conformis' global product revenue could have been approximately 3 percent lower than revenue in Q1 2019, an improvement from the 10 percent decline vs. prior year in Q4 2019. Additionally, leading indicators for Q2 2020 projected a return to positive growth with global product revenue growth estimated to increase to 8 percent vs. prior year. While these estimates were inherently uncertain, had they been realized, this would have been a stepwise improvement in the company's commercial performance, and these results would have been ahead of its previously communicated product revenue growth expectations. These estimates were based in part on positive feedback and uptake the company had been seeing in its new hip franchise, but even more due to its Identity knee launch. The Identity product team delivered a great product concept and launch. The timing is unfortunate.
Currently Conformis is experiencing a significant drop off in orders as elective cases are deferred. It is too early to estimate the total slope of the decline and the duration. Barring a complete national ban on elective surgery, the company does not expect it to come to a compete standstill. Conformis is actively monitoring incoming orders and plan to continue production.
Conformis has also announced a furlough of approximately 80 employees and substantially all of its temporary workforce effective as of today. In preparing to implement this furlough, the company reviewed the role of every Conformis employee and identified functions that are essential and non-essential to support the business over the next eight weeks at reduced production and sales levels. As this crisis passes and orders trend up, we expect to recall employees as needed.
Conformis continues to work with its customers to navigate through this crisis. While there have been historically high levels of cancelled scheduled surgeries, we do expect these cases to eventually move forward. The company is planning for its products to be available when they are rescheduled.
Conformis has undertaken a series of decisive actions aimed at the following goals:
- Protect employees and their families
- Protect production capability
- Protect and support patients and customers
- Communicate, communicate, communicate
The company has taken and continues to take numerous proactive steps to mitigate the negative financial and operational impacts of COVID-19. In an effort to focus on shareholder value, business contingency plans have been implemented and will continue to be adjusted in response to the global situation. The company created a COVID-19 response team to monitor and develop plans and policies to address the COVID-19 threat. It also created a separate, commercially-focused COVID-19 team to proactively seek and capture intelligence from our hospital and physician customers. At Conformis facilities, the firm has initiated increased frequency of cleaning, it is cross training employees, and it has restricted vendor and visitor access. The company ensured that its remote networking capability was in operational readiness for increased capacity as it allowed employees who were able to work remotely and were concerned about coming to the office to work from home. Conformis worked with its medical benefits provider to ensure the company had appropriate coverage and we worked closely with employees to understand and help address the impacts of school closings on their ability to work.
The company immediately conducted a review of its supply chain and partners, which revealed fairly low risk—with the only concerns related to the supply of mask and gown consumables used in its clean room processes. Importantly, the company did order additional 3D printing powder to ensure we had additional supply on hand.
In addition, Conformis has taken steps to reduce all operational expenses across the income statement, including sales, marketing, quality, clinical, regulatory and all general and administrative expense. Non-essential programs have been eliminated or deferred where possible.
Balance Sheet Update
In the current environment, a major priority is preserving liquidity. In addition to the furlough that has been implemented, Conformis has eliminated, reduced, or are deferring significant non-essential expense. In addition, the company is working with suppliers to help match future revenue and expense.
Conformis currently has a $20 million term loan outstanding and an undrawn revolving line of credit with Innovatus Life Sciences Lending Fund I LP as collateral agent and as lender and other lenders under an existing credit facility. At this time, the company does not anticipate drawing on the revolving line of credit under the credit facility. Given the current economic conditions and the closure of elective surgeries across the globe, Conformis may not be able to meet its positive quarterly revenue covenant.
In the event the company is unable to meet any quarterly revenue covenant, the terms of the credit facility provide a mechanism to adjust the revenue covenants to bring it back into compliance. Conformis is initiating discussions with Innovatus with the goal of adjusting the revenue covenants as provided for under the credit facility.
New Product Timeline Impacts
Fortunately, the furloughs announced today have not impacted the company's core new product development talent. However, due to travel prohibitions, surgeon schedule impacts, and concerns regarding a potential increase in uncertainty around regulatory approval timings, Conformis cannot provide a meaningful update to its new product launch schedule at this time. If conditions allow, the company plans to host an investor day this summer to provide a more detailed update about its new product development plans. Though this pandemic has had a horrible financial, psychological and physical toll on society, the company sees interesting opportunities for Conformis depending on how elective surgeries come back online. For instance, the company sees a potential scenario where capital expenditures by hospitals are constrained, operational efficiency is at a premium and ASC arthroplasty procedures accelerate.
No employee resources required for its Stryker development and supply partnership have been furloughed. The company expect to successfully achieve each milestone in connection with this partnership.
2020 Outlook and Commentary
Given the current environment to date, the actions Conformis has disclosed today and the continued business uncertainty, the company is formally withdrawing its 3–6 percent product revenue growth target for 2020. Further, Conformis also withdraws any other aspects of its outlook and assumptions for 2020 as provided in its press releases of Jan. 14 and March 2, and on its earnings call of March 2.