Earnings Call Transcript - ELMD Q2 2021

Devin Sullivan, Investor Relations

Thank you, Kevin, and good afternoon, everyone. Electromed's second quarter fiscal 2021 financial results were released today after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company's website. The company has asked me to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Please refer to the company's SEC filings for further guidance on this matter. Joining us from Electromed this afternoon are Kathleen Skarvan, President and Chief Executive Officer; and Mike MacCourt, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Mike will present a summary of the company's second quarter fiscal 2021 financial results, and then we will open the call for questions. It is now my pleasure to turn the call over to Kathleen Skarvan. Kathleen, please go ahead.

Kathleen Skarvan, CEO

Thank you, Devin. Good afternoon, everyone, and thank you for joining us to discuss Electromed's second quarter fiscal 2021 financial results. We are pleased to report that our net revenue this quarter increased 11.1% year-over-year to a record $9.5 million, driven by 16.1% growth in home care revenue. On the home care side of our business, successful execution of our hybrid virtual and face-to-face selling approach, combined with the ability for prescribers to more easily provide care with the provisional CMS waiver, drove a 16.1% increase in home care revenue compared to the prior year period. The home care success more than offset the ongoing challenges to the other portions of the business negatively impacted by the pandemic, most clearly seen in the year-over-year decline in our institutional business. However, compared to the first quarter of our current fiscal year, our business benefited from our sales team's execution of a hybrid virtual and face-to-face selling approach, increased face-to-face interaction between patients and physicians and improved access to clinics for our sales staff. The CMS waiver temporarily relaxes certain rules for prescribing HFCWO devices to the non-commercial Medicare population during the COVID-19 pandemic. With the CMS waiver, we have experienced an increase in approvals for previously noncovered diagnoses and faster approval times for covered diagnoses. Non-commercial Medicare historically represents approximately 50% of our total payer mix for home care revenue. We believe that the CMS waiver has helped offset a challenging and still ever-changing environment related to the COVID-19 pandemic that has impacted our sales team execution due to patient face-to-face clinic visit concerns and reduced clinic access for our reps. We were pleased that CMS recently extended this waiver until April of 2021. An additional positive trend is with our commercial home care revenue that also increased compared to the prior year benefiting from strong sales team execution and improved on a sequential quarter basis for the same reason, but also due to improved clinic access for sales reps and increased patient face-to-face visits. At the end of the second quarter, we did have 45 field sales employees, of which 38 were direct sales. This compares to 40 total field sales employees, of which 34 were direct sales at the end of the prior year period. While patient and sales rep access to clinics has remained depressed due to the pandemic, we are communicating the benefits of SmartVest to pulmonologists and end users increasingly via virtual platforms and direct-to-consumer marketing. We continue to gain traction with the following fundamental sales and marketing messages that differentiate SmartVest from the competition as we focus on increasing market share, which we believe are key to driving near-term growth. SmartVest produces less squeezing than competitive devices because it releases more air between compressions, providing greater comfort during HFCWO therapy. SmartVest is associated with a lower risk of respiratory infections, which can be serious or life-threatening and can result in costly hospital admissions, reducing the comprehensive cost of care. We have published multiple outcome studies demonstrating that bronchiectasis exacerbation rates drop significantly when using our devices. Our latest prospective bronchiectasis outcome study, which was placed on hold last year due to the pandemic, has resumed at four sites, though patient enrollment has understandably been slower than normal given COVID-19 concerns. SmartVest improves the quality of life. We are leveraging a growing number of patient, positive testimonials that come directly from them. Here is an example of patient feedback: "I wear it twice a day for 20 minutes each. It has been a Godsend and totally turned my life around. I have said it saved my life as I constantly was in the hospital with lung infections. Now I still do the two treatments daily as ordered by my doctors, and haven't been in the hospital for seven years." Finally, when it comes to customer service and clinician support, we believe Electromed is second to none. We are a premier HFCWO device partner, providing comprehensive patient training and support, while streamlining the ordering process and working with insurers to ensure reimbursement is covered. Moving to the institutional side of our business, revenue remained challenged due to reduced hospital purchases in light of COVID-19 and precautions related to aerosol spread, but we did register another sequential quarter increase in single-use disposable wrap orders. Our institutional strategy remains unchanged. We are focused on fortifying the hospital call point and strengthening our partnership with the integrated delivery networks. As a reminder, growth in our institutional business should augment our home care revenue as the HFCWO brand used in the hospital is often the default brand prescribed when discharging a patient. Shifting to the bottom line, we achieved strong second quarter net income of approximately $1.2 million, or $0.13 per diluted share despite higher strategic investments reflected in R&D and SG&A. We are encouraged by this quarter's strong financial results and pleased with our sales team's execution and ability to adapt to ever-changing conditions in the market due to the COVID-19 pandemic. While we continue to operate within the constraints of a pandemic, we are cautiously optimistic about our prospects for continued revenue growth in the second half of fiscal 2021. Against this backdrop, we continue to fund strategic investments for our long-term growth, including research and development on our next-generation device for HFCWO therapy, and expanding our direct-to-patient marketing to increase awareness of bronchiectasis and SmartVest as an effective treatment. We also plan to expand our sales team, beginning recruitment in quarter four, for three to four additional direct reps, and continuing the expansion throughout fiscal 2022. Over the past years, we have benefited from our focus on sales rep productivity, fine-tuned our recruiting profile, revised our onboarding and training to improve time-to-productivity and return on investment. Our planned sales team expansion will incorporate metrics to measure and manage new sales reps to maximize our return on investment. In closing, this quarter, we continued to successfully navigate COVID-19 challenges and could not have done so without the amazing dedication of our employees, whose health, safety and well-being remain our top priority. Non-cystic fibrosis bronchiectasis represents a significant and growing market opportunity, estimated at more than 4 million individuals here in the United States. For those of you who are new to the Electromed story, we believe that approximately 630,000 people with a bronchiectasis diagnosis could benefit from HFCWO therapy, yet only an estimated 77,000 patients in the Medicare population are currently being treated with a device like SmartVest. The growing body of clinical evidence, combined with the powerful patient testimonies that we routinely hear, support the use of our SmartVest as a standard of care among individuals with bronchiectasis. In this context, we are committed to delivering long-term profitable growth while maintaining the highest standards of integrity, respect, and privacy. With that, I will turn it over to Mike for a more detailed discussion of our financial results.

Michael MacCourt, CFO

Thank you, Kathleen, and good afternoon, everyone. As Kathleen shared, our net revenue in the second quarter of fiscal 2021 increased 11.1% to $9.5 million from $8.5 million in the second quarter of fiscal 2020, driven by growth in home care revenue. Home care revenue increased 16.1% to $8.9 million, primarily due to higher referrals and approvals compared to the prior year period. Institutional revenue decreased 37.4% to $309,000 from $494,000 in the prior year period, primarily due to a decrease in the volume of devices and disposable reps sold due to COVID-19's continued impact on hospital purchasing activity. Home care distributor revenue increased 13.7% to $149,000 from $131,000 in the prior year period. International revenue, which is not a strategic growth area for Electromed, decreased 46.6% to $135,000 compared to $253,000 in the prior year period. Gross profit in the second quarter of fiscal 2021 increased 12.7% to $7.5 million or 79.2% of net revenue from $6.7 million or 78.1% of net revenue in the prior year period. The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within the home care market. Operating expenses, which include SG&A as well as R&D expenses, totaled $5.9 million or 62.6% of revenue in the second quarter of fiscal 2021 compared with $5.1 million or 59.8% of revenue in the same period of the prior year. SG&A expenses increased 9.5% to $5.4 million in the second quarter of fiscal 2021 from $5 million in the same period of the prior year, primarily due to increased payroll and compensation-related expenses associated with higher incentive payments on stronger home care revenue and higher average sales and marketing headcount as well as increased direct-to-consumer marketing expenses, partially offset by lower travel, meals, and entertainment expenses. R&D expenses increased to $507,000 or 5.3% of net revenue in the second quarter of fiscal 2021 from $143,000 or 1.7% of net revenue in the prior year comparable period, primarily due to investment in our next-generation product development. We estimate that R&D expenses will be in the 4% to 6% of net revenue range for the duration of fiscal 2021. Operating income totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. Net income before income tax expense totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. In the quarter, income tax expense totaled $389,000 compared to $419,000 in the same period of the prior year. Our effective tax rate in the second quarter of fiscal 2021 was 24.4% compared to 26.1% in the prior year period. Our net income totaled $1.2 million or $0.13 per diluted share in the second quarter of fiscal 2021 compared to $1.2 million or $0.14 per diluted share in the prior year period. Now moving on to the balance sheet and operating cash flow. Our balance sheet on December 31, 2020, included cash and cash equivalents of $11.7 million, no long-term debt, working capital of $27.4 million, and shareholders' equity of $32.3 million. Cash flow from operations in the second quarter of fiscal 2021 totaled $669,000 compared to $1.4 million in the comparable prior year period. Cash flow from operations was impacted by a $1.8 million increase in accounts receivable compared to the end of the prior quarter, primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle. The Medicare portion of home care is high-quality accounts receivable, and we expect this revenue to convert to future cash flow at similar ratios as prior periods. We are pleased to be debt-free and with a strong balance sheet to support our long-term growth strategies. We are currently evaluating options regarding the optimal use of our cash to maximize shareholder value, and we expect to share more specific strategies for the use of our cash by the end of fiscal year 2021. This concludes our prepared remarks. Operator, please start the Q&A portion of the call.

Kyle Bauser, Analyst

Great to see that the CMS waiver was extended. Is it reasonable to assume this should continue to be extended? And even if it wasn't, do you think there'll be some lasting effects to it? It seems like the turnaround has become very quick for the Medicare channel. Just kind of wondering how you think that plays out?

Kathleen Skarvan, CEO

Kyle, thank you for the question. So yes, the CMS waiver is really an interesting dynamic that's been a positive outcome for many, many patients since the pandemic. And so we think about the waiver as, yes, it's tied with the public health emergency. And so with the public health emergency being extended in 90-day increments, we would expect as long as there still are many people that haven't been vaccinated, I can't see into the mind of health and human services specifically, but I think the Biden Administration is going to be as positive as possible in doing everything that will help us to get through the pandemic as easily as possible and with the benefits that have been in place that they'll continue. So I do think there's a strong chance that it will continue for a period of time yet. And as far as the benefits, we would describe the benefits in a couple of ways. For sure, patients are benefiting with those that may not have had a diagnosis that was reimbursed in the past for those non-commercial Medicare patients. And previously, we would receive those, but we would have to push those into an appeal process, as you know. So now, those patients, and quite a few of them are COPD patients, as you can imagine since there are many COPD patients with a phenotype where they do have mucociliary issues, they have frequent exacerbations, they're frequently hospitalized with lower respiratory infections. And so now the physician has the opportunity to prescribe a therapy that they know will benefit that patient, and they also know that that patient will receive reimbursement. And so we're going to take that information that we're going to take that physician who may have been maybe reluctant to prescribe maybe because they thought it was burdensome to manage the medical records that are needed for reimbursement of the requirements. And we're going to provide that physician 5-, 30-, and 90-day feedback on their COPD patient or their non-covered diagnosis patient. And we're going to be able to show them what the value is for that patient. And while we're doing that, we're going to continue educating them on how reimbursement works for those non-commercial Medicare patients. And we were just really pleased this quarter to see that our commercial payer, where that waiver doesn't apply, that even grew sequentially and year-over-year. So those are ways that we're looking at this as a longer-term benefit even if the CMS waiver goes away. And then finally, not to be so long-winded, but I do want to mention that we think of the waiver as an offset to the issues that are keeping our sales reps from being able to access clinics right now during the pandemic and also due to some of those patients that are reluctant to go in face-to-face. So I think there's multiple wins, but thank you for the questions.

Kyle Bauser, Analyst

Interesting. And I appreciate that. And then remind me on the status of enhancements to the SmartVest. Are these something that you envision talking about ahead of a potential 510(k) clearance? Or is this something that we'll learn about upon clearance and I should just stop asking?

Kathleen Skarvan, CEO

Well, you can always ask, Kyle, right? So I think that we will be quite close to the vest or the chest on sharing much about what those new benefits may be from our next-generation product. I think, for competitive reasons, we certainly want to be doing that. And also that before we have clearance, we wouldn't want to share what possible claims could be or those performance or feature and benefit enhancements. So yes, I think we will be waiting until that time frame.

Kyle Bauser, Analyst

Got it. Understood. That makes sense. And then just lastly, there's some really good testimonials out there, places like YouTube, that highlight the clear advantages of SmartVest over the competition, pretty compelling cases. I'm curious if you have a sense for where your new business is coming from. So if we're talking just new business, what percent, I guess, ballpark is coming from taking share versus actually growing up the bronchiectasis and COPD market?

Kathleen Skarvan, CEO

Thank you for your question, Kyle. We track the percentage of our referrals coming from current prescribers of SmartVest and those who have not prescribed it in the past one to two years. Based on this data, I can share that nearly half of our referrals are from prescribers who previously did not prescribe SmartVest. This is happening across various physicians and clinics, indicating some momentum in market share, though I wouldn't categorize it all as market share growth.

James Terwilliger, Analyst

Can you guys hear me?

Kathleen Skarvan, CEO

We can, James. Nice to hear from you.

James Terwilliger, Analyst

Great job with the numbers. It was a very impressive quarter, in my opinion, showing strong year-over-year and sequential growth. I don't want to limit your guidance, but given how strong these numbers are, how should we approach the second half of fiscal 2021 considering the various factors at play, such as your true internal growth rate, the ongoing impact of COVID, and the new Biden Administration? Can you provide any high-level insights on what we might expect for the second half of fiscal 2021?

Kathleen Skarvan, CEO

I believe you’ve already addressed part of your question. There are many variables at play right now. We have mentioned that we are positioned for growth in the second half compared to last year. However, due to the current uncertainty, we cannot provide a definitive outlook at this point.

James Terwilliger, Analyst

No, I understand. And again, you've got to manage what's coming through the door. Is there any type of seasonality as we move kind of here just closing out the December month going into the colder months of March and then moving out? Is there any type of seasonality in your core business with what you're treating?

Kathleen Skarvan, CEO

Yes. So in the past, James, we have often seen the March quarter be one of our seasonally higher quarters and that was often, we believe, linked to the influenza season. And so you might have more people with bronchiectasis or COPD or other lung function issues that might be more susceptible to influenza. And so they're going in to see their doctor and that's at a point where the doc says, hey, now is a good time for us to prescribe HFCWO or SmartVest. As you know, the influenza season is not here like it was in years past due to the fact that people are staying home, they're not socializing and they're wearing masks. So we're not expecting that same type of seasonality necessarily.

James Terwilliger, Analyst

Okay, that clarifies a lot and makes complete sense. Lastly, on a high level regarding this waiver, I have two questions. First, I believe this is expanding and growing your total addressable market. Second, once they start using this type of treatment, will it be difficult for them to reverse that decision if they expand some clinical indications that you can treat and help people with?

Kathleen Skarvan, CEO

That's a great question. We've been thoroughly investigating this situation and talking to various industry stakeholders to better understand how easily CMS can revert to historical requirements after maintaining a waiver for an extended period. We will keep you updated in future calls regarding any potential for an extension or whether this could become a condition that continues to receive approval for HFCWO moving forward. For now, we are still examining what this might entail, but it remains uncertain at this point.

Devin Sullivan, Investor Relations

We'd like to thank you all for participating on our call this afternoon. We look forward to reporting back to you in May, when we'll release our third quarter fiscal 2021 financial results. Have a good evening.

Operator, Operator

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