Earnings Call Transcript - ECOR Q4 2023

Operator, Operator

Hello, and welcome to the electroCore Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. A question-and-answer session will follow the formal presentation. At this time, I'd like to turn the call over to Dan Goldberger, CEO. Please go ahead, sir.

Dan Goldberger, CEO

Thank you all for participating in today's electroCore earnings call. My name is Dan Goldberger, I am the Chief Executive Officer of electroCore and I'm also a member of the Board of Directors. Joining me today is Brian Posner, our Chief Financial Officer. Earlier today, electroCore published results for the fourth quarter and full year ended December 31, 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 the call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements including, without limitation, any guidance, outlook or future financial expectations or operational activities and performance are based upon the company's 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 undue reliance on these statements. For a list of the risks and uncertainties associated with the company's business, please see the company's filings with the Securities and Exchange Commission. electroCore 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 that is accurate only as of the live broadcast today, March 13, 2024. electroCore was founded in 2005 to commercialize the use of our proprietary noninvasive vagus nerve stimulation for medical and general wellness applications. The vagus nerve is the longest cranial nerve in the body, bringing information from the visceral organs to the brain. Stimulating the vagus nerve affects many important autonomic functions in the brain and in the body, including neurotransmitter levels, inflammation levels and metabolism. Surgically implanted vagus nerve stimulators have been available from other companies for more than 40 years for chronic conditions like epilepsy and depression. So a large and growing database confirms the safety and efficacy of the technique. Building on that science, electroCore pioneered noninvasive vagus nerve stimulation and our products are now available by prescription for certain headache conditions and without a prescription for general wellness and human performance. Our pipeline of potential future indications and products continues to grow as clinicians, researchers and wellness advocates become more familiar with the benefits of non-invasive vagus nerve stimulation. We're thrilled to report revenue of $16 million for the full year ended December 31, 2023, an 87% increase over the prior year. This represents a compound annual growth rate of greater than 60% since Brian and I joined the company five years ago. 2023 was capped off by a fifth consecutive record revenue quarter with sales of $5.2 million for the three months ended December 31, 2023. That's a 103% increase over the fourth quarter of 2022 and approximately $21 million annual run rate as we enter 2024. Gross margins continued to be strong, increasing from 81% to 83% for the full year 2023, and Brian will discuss the financials in more detail later on. We launched our prescription headache business in 2017, selling primarily to specialty pharmacies. Since then, our prescription headache business has grown worldwide, including sales that are covered by national health systems such as the VA hospital system in the U.S. and the National Health Service in the United Kingdom, cash pay sales in the commercial channel and through certain managed care systems. We launched two new nonprescription general wellness product lines in late 2022. The Truvaga is a direct-to-consumer brand and TAC-STIM for human performance is for our active duty military personnel. Both new brands exceeded our expectations in their first full year sales and are driving excitement about the future. The VA hospital channel continues to be our largest customer. You'll recall that our gammaCore prescription therapy is free to patients covered by Veterans Administration benefits, representing about 9 million covered lives across approximately 1,300 health care facilities. Sales in the VA channel grew 89% to $9.6 million in 2023 from $5.1 million in 2022. 147 VA facilities have purchased prescription gammaCore products through December 31, 2023, as compared to 117 through December 31, 2022. The VA Hospital Administration Headache Centers of Excellence, the HCOE, estimates approximately 600,000 patients are being treated for headache in the VA hospital system. Since we have dispensed approximately 4,400 gammaCore devices to veterans, that represents less than 1% of the total addressable market within the VA system. In order to further penetrate the channel, in August 2023, we signed a non-exclusive distribution agreement with Lovell Government Services, giving Lovell the right to list and distribute certain prescription gammaCore products into the federal market. Lovell is a service-disabled, veteran-owned small business offering medical and pharmaceutical goods and services to federal health care providers. Listing products with Lovell is intended to streamline the sales process to a variety of government procurement channels, which helps government agencies meet their SDVOSB procurement goals. Customers for these contract mechanisms include the Veterans Health Administration, VHA, the Military Health System, MHS, and Indian Health Services, IHS, which we believe serve up to 21 million patients combined. Truvaga is currently available exclusively through our e-commerce platform. We are positioning Truvaga as a direct-to-consumer general wellness product for stress, relaxation, sleep and mental acuity. We are carefully managing our Truvaga advertising spend as we fine-tune our messaging and prepare to launch our next-generation mobile app-enabled general wellness product, Truvaga Plus. Full-year 2023 Truvaga net sales were approximately $1 million. Truvaga net sales in the fourth quarter of 2023 were approximately 21%, up sequentially from the third quarter of 2023. For the full-year ended December 31, 2023, our revenue return on advertising spend, what the industry calls a media efficiency ratio, or MER, was approximately $2.27. In other words, we're spending $1 to generate $2.27 of revenue. We're carefully monitoring Truvaga return rates, which continue to be 11% to 12% of shipments. We believe that the Truvaga business could scale nicely if we maintain or improve these metrics, and we're excited about the anticipated launch of Truvaga Plus next month. TAC-STIM for human performance is being sold to select Air Force Special Forces and Army Special Forces units for accelerated training, sustained attention, reduced fatigue and improved mood, as defined by the Air Force Research Laboratory. No prescription is required, and more information is available on our website. For the full-year ended December 31, 2023, we recorded $1.75 million of TAC-STIM sales. The sales funnel for this product continues to grow as word spreads across active duty military units of the potential human performance benefits provided by TAC-STIM. In parallel, we've developed a second-generation product known internally as TAC-STIM Black in collaboration with the Air Force Research Laboratory, and we continue to build prototypes for evaluation by our government research partners. We've stated before that revenue growth for this product line is likely to be lumpy as active duty units purchase in bulk for pilot deployment, and we expect TAC-STIM revenues in the first quarter of 2024 to be down sequentially due to the timing of these orders. Our physician dispensed cash pay channel, including gC Direct and gConcierge, grew 42% to $1.7 million during the full-year 2023, from $1.2 million in the full-year 2022. There were 1,843 cumulative revenue-generating cash pay prescribers as of December 31, 2023, up from 948 on December 31, 2022. We believe that the increase in revenue-generating prescribers could be a leading indicator of future growth, and we'll continue to report this metric in our investor presentation and in subsequent quarters. Last year, we announced a distribution agreement with Joerns Healthcare, LLC that we believe will add more than 12.5 million covered lives within a select managed care health system. The business model with Joerns is similar to how we work with the VA hospital system. Joerns handles adjudications, billing and collections, while electroCore ships directly to patients and provides in-servicing and patient support. Our field sales team is responsible for building awareness among clinicians within those managed care systems. We continue to work with Joerns on the implementation and continue recording small recurring revenue from this relationship during the fourth quarter of 2023. Our field sales function is developing champions within the target managed care system, and we think Joerns could be a significant revenue source in the second half of 2024 and beyond. Revenue from channels outside the United States increased by 13% in U.S. dollars to $1.8 million in the full year 2023, as compared to $1.6 million for the full year 2022. Revenue from channels outside the U.S. increased 18% in local currency for the full year 2023 as compared to 2022. Most of our OUS revenue was generated in the United Kingdom by prescription gammaCore sales funded by the National Health Service. Now turning to our clinical progress. On October 24, 2023, we announced top line data from an abstract presented at the 2023 American College of Gastroenterology Annual Meeting regarding the potential for non-invasive vagus nerve stimulation to decrease the use of acute rescue medications for exacerbations of nausea due to gastroparesis or functional dyspepsia. The study is entitled Noninvasive Vagal Nerve Stimulation Reduces Nausea Rescue Medication in Patients with Gastroparesis and Related Disorders with Additional Benefits on Multiple Other Associated Symptoms. The primary endpoint was reducing the use of antinausea medications. On October 10, 2023, we announced 2 abstracts that were presented at the 15th World Stroke Congress on the possible role of non-invasive vagus nerve stimulation in the treatment of acute neurological injuries. The first trial, entitled Noninvasive Vagus Nerve Stimulation is Safe and Efficacious in the Treatment of Headache Associated with Subarachnoid Hemorrhage, was conducted at Northwell Health in New York, and showed a significant reduction in the overall pain score and a decrease in the average morphine equivalent dosage after two weeks of treatment, as well as a trend towards a reduction in the average hospital stay. The second study, entitled Noninvasive Vagus Nerve Stimulation in Acute Ischemic Stroke, is a prospective randomized clinical trial with blinded outcome assessment being conducted at the Leiden University Medical Center. 50 patients with ischemic stroke were randomly allocated 1:1 to receive non-invasive vagus nerve stimulation for five days in addition to standard treatment versus standard treatment alone. This study has been fully enrolled, and we hope to see top line data by the end of 2024. We'll continue to provide updates about our pipeline and other opportunities as they become available. Now I'll turn the call over to Brian for a review of our financials and other guidance items.

Brian Posner, CFO

Thank you, Dan. Net sales for the year ended December 31, 2023, increased 87% as compared to the year ended December 31, 2022. The increase of $7.4 million is due to an increase in net sales across major channels, including our prescription gammaCore medical devices sold in the U.S. and abroad, and revenue from the sales of our nonprescription general wellness and human performance, Truvaga and TAC-STIM products. Gross profit of $13.2 million increased $6.3 million for the year ended December 31, 2023, compared to gross profit of $7 million for the year ended December 31, 2022. Gross margin was 83% and 81% for the years ended December 31, 2023, and 2022, respectively. Total operating expenses in the full-year ended December 31, 2023, were approximately $32.5 million, as compared to $29.9 million for the full-year ended December 31, 2022. Research and development expense of $5.3 million for the year ended December 31, 2023, decreased by $200,000 from $5.5 million during the full-year ended December 31, 2022. This decrease was due to cost-cutting measures, offset by our targeted investments to support the next generation of the company's non-invasive nerve stimulators. Selling, general and administrative expense of $27.2 million for the year ended December 31, 2023, increased by $2.8 million, compared to $24.3 million for the previous year. This increase was primarily due to our greater variable selling and marketing costs, consistent with our increase in sales, offset by decreases in insurance and stock-based compensation expenses. GAAP net loss for the full-year of 2023 was $18.8 million, as compared to the $22.2 million net loss for the full year 2022. Adjusted EBITDA net loss for the full-year of 2023 was $15.4 million, as compared to an adjusted EBITDA net loss of $19 million for the full-year of 2022. A reconciliation of GAAP net loss to non-GAAP adjusted EBITDA net loss has been provided in the financial statement tables included in today's press release. Cash, cash equivalents, and restricted cash at December 31, 2023, totaled approximately $10.6 million, as compared to approximately $18 million as of December 31, 2022. In July 2023, the company raised net proceeds of approximately $7.5 million through a registered direct offering and concurrent private placements priced at the market under NASDAQ rules. And now I'll turn the call back over to Dan.

Dan Goldberger, CEO

Thank you, Brian. I'm very proud of our full-year 2023 operating results and with the continued momentum in our prescription headache and general wellness businesses. All of our operating metrics continue to beat expectations, and we continue to be enthusiastic about the company's long-term prospects across all brands and product lines. The launch of our first general wellness product, Truvaga 350, was received favorably by the market as evidenced by greater than $1 million of revenue in its first full year sales and the efficiency of our media spend to drive those sales. The brand continues to show significant potential as a direct-to-consumer general wellness offering, and we are incredibly excited about the anticipated launch of our next-generation Truvaga Plus product next month. Truvaga Plus will be the first mobile app-enabled cervical noninvasive vagus nerve stimulator on the market, and will leverage many of the patents involving the control of the stimulator using a smartphone device that we've secured over the last few years. We'll continue selling Truvaga products through our e-commerce site and hope to add additional channels and product offerings to increase the lifetime value of each customer. We will continue to monitor our KPIs and metrics and adjust our investment in all of our consumer channels as the year progresses. A pipeline of interest from different branches of our active duty military continues to develop for our TAC-STIM and second-generation TAC-STIM Black products. Sales of the TAC-STIM brand are likely to be lumpy as active duty units purchase in bulk for pilot deployment. Longer term, we also believe that there may be civilian crossover as first responders, elite athletes, transportation workers, traders and e-gamers become aware of the human performance benefits established so far. Demand for our prescription gammaCore therapy in the VA channel continues to grow based on clinical performance and our increased presence in the field. We have about 35 straight commission sales agents, representing about 90-99 reps in the field, managed by our small team of territory business managers and supported by our customer experience team. This hybrid structure is very scalable as we deploy prescription gammaCore around the country. During 2023, our sales and marketing expense increased by approximately $3.3 million over 2022, while sales grew by $7.4 million, signaling that there may be real leverage opportunities in the P&L. Further out, we're working towards establishing additional indications for prescription gammaCore to treat posttraumatic stress disorder, opioid use disorder and other clinical opportunities. We have lots of positive momentum leading into 2024, including, one, continued growth in our U.S. prescription headache business in both the VA and commercial channels. Two, anticipated launch of our next-generation Truvaga Plus product next month for general wellness, mental acuity and sleep driven by ongoing consumer marketing efforts. Three, further development of the TAC-STIM brand and launch of TAC-STIM Black later in the year for human performance in the active duty military and civilian crossover. Four, revenue through our distribution agreement with Joerns Healthcare for the sale of prescription gammaCore within a select managed care health system. Five, prescription gammaCore label extensions for a variety of indications over time. And six, more than enough cash to execute our plan through 2024 and close the cash flow gap even further. At this time, I'll turn the call over to the operator. Operator, please open the line for questions.

Operator, Operator

Thank you. We will now move on to the question-and-answer session. Our first question today is from Jeffrey Cohen of Ladenburg Thalmann. Your line is now live.

Jeffrey Cohen, Analyst

Hi, Dan and Brian, how are you?

Dan Goldberger, CEO

Good, thank you. How are you, Jeff?

Jeffrey Cohen, Analyst

Good. I'll keep it brief. Do you plan for Truvaga Plus to eventually replace Truvaga, or do you believe that the functionality might provide different benefits for different users?

Dan Goldberger, CEO

It's a great question, Jeff. We're going to launch next month our Truvaga Plus. We're going to continue to offer the Truvaga 350 at a lower price point. They've got different feature sets. And that will allow us to do some price discovery. It will allow us to learn more about what feature sets are more important to different customer segments. So for the foreseeable future, I think we're going to be offering at least two different product configurations in the direct-to-consumer truvaga.com channel.

Jeffrey Cohen, Analyst

Okay, could I ask about TAC-STIM? It had a good quarter, by the way. What's the difference between TAC-STIM Plus and TAC-STIM? Is it related to power, amplification, or cellular connectivity?

Dan Goldberger, CEO

So we call it TAC-STIM Black, but I think I know what you meant. There are images of the TAC-STIM Black on our website. And just by coincidence, I spent the last two days in Dayton, Ohio with the team at Air Force Special Forces. TAC-STIM Black is a much more rugged implementation and more powerful implementation. And we're on track to launch that as a commercial off the shelf device later this year.

Jeffrey Cohen, Analyst

Interesting. Okay. And then lastly for us, any commentary on OUS business outside of NHS in the U.K.?

Dan Goldberger, CEO

Yes, another very good question. The NHS has been very supportive in that business in the U.K. continues to grow sort of middle single digits, right, 4% to 6% year-on-year. We've not been successful gaining reimbursement in other national health systems. And for the short term, for the time being, I would rather make those investments in the U.S. rather than Europe. As our direct-to-consumer business matures, we'll be looking at taking Truvaga to Canada and Australia first, and then the U.K. and Western Europe after that.

Jeffrey Cohen, Analyst

Okay. And then lastly, there's no guidance or information regarding 2024 or the first quarter.

Dan Goldberger, CEO

No, we're not going to provide guidance. We're comfortable with the current analyst consensus, and we need to observe the new product launch before we can confidently comment on the second half of the year.

Jeffrey Cohen, Analyst

Perfect. Okay, nice readout and full-year. Thanks for taking our questions.

Dan Goldberger, CEO

Thank you, Jeff.

Operator, Operator

Thank you. Our next question is coming from RK from H.C. Wainwright. Your line is now live.

Swayampakula Ramakanth, Analyst

Thank you. Good afternoon, Dan and Brian. Hope you're doing good. So when you closed the quarter and you also said, based on the fourth quarter, it's an annualized run rate of $21 million. So what could be the drivers for it to push beyond the annualized number of $21 million in your thinking?

Dan Goldberger, CEO

We've been experiencing a year-on-year growth of 100% for the past two quarters, and our full-year growth is projected at around 75% to 78%. I am confident that we can maintain this momentum. Our largest customer is the VA hospital channel, and we're increasing our presence in the field each month without any signs of slowdown in that area. The Joerns distribution agreement offers significant potential, with a total addressable market of over 12 million covered lives where we are just beginning to raise prescriber awareness. Additionally, we have two new product lines, Truvaga and TAC-STIM, which represented 20% of our business last year, although they are still small in numbers and have considerable growth potential. Therefore, I am very optimistic about acceleration as we move through this year.

Swayampakula Ramakanth, Analyst

Could you provide more insight into how Joerns Healthcare could expand not just in 2024, but also in 2025? We have heard over the last few quarters about small revenue achievements. Do you believe that by now you have resolved all the issues in the system and established enough relationships to see consistent revenue growth, becoming significant by the end of 2024?

Dan Goldberger, CEO

Yes. The process of establishing the infrastructure, gaining formulary access, and educating prescribers and clinicians is taking longer than I anticipated. Therefore, you won't see significant numbers this quarter. I believe the growth will really take off in the second half of this year, and it's certainly more of a 2025 narrative.

Swayampakula Ramakanth, Analyst

Okay. Regarding the TAC-STIM, you mentioned a good start of $1.75 million for the year and that the funnel is growing. However, Congress has not yet decided on government operations. How do you anticipate this impacting growth? Additionally, you mentioned that the first quarter won't surpass the fourth quarter in terms of numbers. Could you elaborate on those points?

Dan Goldberger, CEO

Yes. That's exactly right. The continuing resolutions have affected some of the contracts that are in process. And our first quarter 2024 TAC-STIM sales are going to be sequentially down from the fourth quarter. That said, these are solid purchase commitments. They're just sliding with the continuing resolutions. And there are many companies that are in this situation that deal with the Department of Defense. For us, it's still a very small part of our business. But hope springs eternal that our government will figure itself out. But there's growing demand for our human performance product. It's very exciting.

Swayampakula Ramakanth, Analyst

Very good. And then the last question from me is on the prescriber front. It's really great to hear that the cash-based prescribers are continuing to increase. I mean I can sit down and look at this, but because you said this could be a leading indicator, I want to ask you, what sort of a correlation are you seeing in terms of the growth of the prescribers and the revenue? I'm just trying to understand how to think through that growth because it can certainly just grow like crazy over this year, but I just want to understand how that growth could come through.

Dan Goldberger, CEO

Yes. The best way to understand it is through the 80-20 rule. Approximately 20% of the prescribers are responsible for 80% of the revenue. There are two perspectives to consider. First, it's a numbers game; we need to enroll 100 prescribers to find 20 high performers. Additionally, in the latter half of this year, we aim to identify the traits of successful high-revenue cash practices. We will focus on discovering these characteristics to enhance our recruitment of new customers and potentially implement marketing strategies for the 80% of prescribers who are not generating significant revenue. There is still much to explore regarding our business model.

Swayampakula Ramakanth, Analyst

Okay. Thank you very much. Thanks for taking all my questions. And good luck.

Dan Goldberger, CEO

Absolutely.

Operator, Operator

Thank you. Next question today is coming from Anthony Vendetti from Maxim Group. Your line is now live.

Anthony Vendetti, Analyst

Yes, thanks. I was just wondering if you had an update on the ongoing clinical trials and any expectations for readouts in 2024?

Dan Goldberger, CEO

Yes. So the NOVIS trial in acute stroke is fully enrolled. I think the last patient last consult happened last month. And so I'm optimistic that we'll see top line data in July, August kind of a timeframe. And similarly, the Parkinson's gait trial in Newcastle was fully enrolled at the end of last year. And so I'm hoping we see top line data in April or May. Actually, turning those into publications is going to take much longer. But that top line data in both indications will obviously impact our strategic thoughts about how do we leverage that data into an expanded indication and expanded label.

Anthony Vendetti, Analyst

Okay. Great. And then just in terms of the VA, obviously, it's one of your primary channels, how would you characterize current penetration? And I know there's still an opportunity there, but what is the overall opportunity that remains with the VA?

Dan Goldberger, CEO

Sure. So I measure penetration in two ways. In terms of facilities, we are about 12% of the 1,300 facilities out there now, so still a lot of room to grow. But the better number to look at is the number of headache patients. I think there's roughly 600,000 headache patients per year in the VA hospital system. And by that metric, we're just barely 1% penetrated. Now as we make progress with PTSD, that dramatically increases the denominator, and of course, unfortunately, PTSD has a high prevalence in the VA hospital population, same with substance abuse, same with Parkinson's and other neurological conditions. So as we add indications, our denominator gets bigger, and our penetration gets smaller, and opportunity gets bigger.

Anthony Vendetti, Analyst

Okay, great. Thanks for the update. Appreciate it all the color.

Dan Goldberger, CEO

Thanks.

Operator, Operator

Thanks. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Dan Goldberger, CEO

Thank you, operator. We appreciate everybody joining today's call. I want to specifically say thank you to all of our employees who've been working tirelessly to deliver our amazing therapy to patients. Our team has done a great job of staying nimble, scaling the business and responding to the needs of our customers and health care providers alike, leading to the more than 60% compound annual growth over the last five years. I also want to thank the health care professionals and their patients for their loyal support of gammaCore therapy. Consumers, to their adoption of our Truvaga products as a tool to improve general wellness, and our champions at the Air Force and Army Special Forces. You all have a good evening.

Operator, Operator

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.