Myomo, Inc. Q4 FY2021 Earnings Call

Good afternoon, and welcome to MedAvail's 2021 Fourth Quarter Earnings Conference Call. My name is Sam, and I will be your moderator for today's call. At this time, I'd like to turn the call over to our host, Caroline Paul, from Investor Relations. Caroline, please proceed.

Thank you, and thank you all for participating in today's call. Joining me are Mark Doerr, Chief Executive Officer; and Ramona Seabaugh, Chief Financial Officer. Earlier today, MedAvail Holdings, Inc., referred to as MedAvail or the company, released financial results for the fourth quarter and full year ended December 31, 2021. 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, including statements or responses in addressing your questions that include forward-looking statements within the meaning of 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 are in response to your questions that relate to expectations or predictions of future events, results or performance, or similar statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19, and the military action launched by Russian forces in Ukraine on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion, and guidance for revenue, gross margin and operating expenses in 2022 are based upon our current estimates and various assumptions. Any forward-looking 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. You should not place undue reliance on these statements and should not rely on them in making an investment decision without considering the risks associated with such statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section in our most recent periodic reports, including our annual report on Form 10-K and our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. In addition, as part of this earnings call, the company's management team is providing additional financial information related to adjusted EBITDA. The company calculates adjusted EBITDA, a non-GAAP financial measure, by including interest expense, depreciation and amortization, stock-based compensation and excluding nonrecurring expenses and other income to net loss. The company has included adjusted EBITDA in this earnings call because it is a key measure used by the company's management and Board of Directors to evaluate and compare the company's financial and operational performance over multiple periods, identifying trends affecting the company's business, formulating business plans and making strategic decisions. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of noncash expenses and certain nonrecurring variable charges. In addition, the company believes that providing each of EBITDA and adjusted EBITDA, together with a reconciliation of net loss to each such measure, helps investors make comparisons between MedAvail and other companies that may have different capital structures, different tax rates and/or different forms of employee compensation. Adjusted EBITDA should be viewed as measures of operating performance that are supplement to and not substitute for operating loss, net loss and other U.S. GAAP measures of income and loss. Non-GAAP financial measures used by the company may be calculated differently from and, therefore, may not be comparable to similarly titled measures used by other companies. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 24, 2022. MedAvail 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. And with that, I will turn the call over to Mark.

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us. I'm very pleased to be participating in my first earnings call as CEO of MedAvail. It is a privilege to be leading this company, and I thank the Board for this opportunity. By way of background, I've spent my entire career in pharmacy, starting as a pharmacist and working across this industry in various other capacities, including leading national and regional retail pharmacy chains. Most recently, I was CEO of eRx Network until its acquisition by Change Healthcare in 2020. Under my 3-year tenure, the company's revenue and EBITDA increased in each year before the acquisition. I believe that pharmacy is a big business with a significant opportunity for novel models to improve efficiency and patient outcomes while achieving discipline with respect to cost and quality. And I strongly believe that our new team at MedAvail is uniquely poised to address this opportunity. I was attracted to MedAvail for 2 reasons. First, I was impressed by MedAvail's differentiated technology platform, our MedCenter and its supporting system that enables our on-site pharmacy at the point of care in a cost-effective way. Second, I believe in the opportunities that our solutions provide given how strongly positioned we are to solve a multifaceted problem that challenges pharmacy services today. There's a clear need for solutions to address the gaps faced by both retail pharmacies and at-risk value-based medical providers. Retail pharmacies struggle with labor shortages and higher costs, resulting in reduced operating hours and compromised service levels, which effectively limit patient access to their medications. These factors contribute to reduced patient satisfaction and lower medication adherence. Poor medication adherence tends to result in suboptimal patient outcomes and impacts the Star Ratings for at-risk providers, which, in turn, affects the reimbursement levels provided by TMS. Moreover, many medical providers don't have adequate connectivity to the many pharmacists that their patients utilize, constraining their ability to gain insights on medication adherence for their patients, which limits their ability to impact patient outcomes. To address these challenges head-on, we deliver flexible and comprehensive solutions to our partners with a model that I believe is increasingly essential for value-based care delivery. At the core of our offering is our proprietary MedCenter platform through which we deliver cost-effective pharmacy prescription dispensing and advice at the point of care to provide better and more convenient patient access and drive improved outcomes and provider satisfaction and reimbursement. Since joining MedAvail, my confidence in our business and the opportunities for it has grown. There is a tremendous market opportunity to be realized with our solutions, and we have a definitive road map intended to meet this rising demand. I also believe that we have a clear pathway to deliver profitable growth in the business. To that end, as some of you already know, our business model has 2 segments: Pharmacy Technology and Retail Pharmacy Services. And I would like to walk you through what we are doing with each segment. Starting with Pharmacy Technology. This area of our business represents the most significant opportunity for MedAvail and is a large part of our path towards profitability. We sell our hardware and importantly, license our software and systems to support it and provide maintenance for the platform, which is intended to create a highly profitable recurring revenue stream. Our MedCenters are currently being operated by large scalable partners such as Sam's Club, HCA and Texas Health Resources, a mix of retail and health system pharmacies, which we believe are both very viable channels for our expansion. We are also pleased to have recently partnered with the University of Florida. We will provide an initial 3 MedCenters to be deployed in their various campus facilities and have the opportunity to expand this relationship to include a variety of additional sites. A critical component to the Pharmacy Technology segment is the MedCenter interface with the pharmacy management system. As part of our focus to drive growth in this business, we have received approval for our app to be in the Epic App Orchard, which will allow us to integrate into the Epic platform through Epic Willow, its outpatient pharmacy management system. This capability is intended to allow us to add site deployments with the many health system customers who use Epic and will significantly reduce the time from signing a deal with MedAvail to deployment of our platform. Importantly, we anticipate that this integration work will open the market of installed Epic users to MedAvail as prospects for our Pharmacy Technology. Currently, there are approximately 350 integrated delivery networks using the Epic pharmacy software in the United States, representing thousands of potential sites for our MedCenter. We expect this integration through Epic Willow to be completed in the second quarter of 2022. To support the growth opportunity that we see with the Pharmacy Technology, we are making investments and strengthening our team. We recently added new sales leadership and support in this segment and are continuing to develop our team to drive product innovation and sales. Turning to Retail Pharmacy Services and SpotRx, our highly scalable hub-and-spoke pharmacy model, we deliver a unique value proposition to our clinic partners with our embedded SpotRx Pharmacy. And we are focused on clinic operators that service the Medicare market with large and growing networks to maximize the potential of our land-and-expand strategy. Our clinic partners primarily operate in a value-based care model and are looking for a pharmacy partner that can fully complement their patient care and reimbursement models. We leverage data to drive patient adoption, monitor performance to adapt and optimize our offering to each clinic location, helping to identify and focus on high-value patients for our partners. Each of our SpotRx service areas operate a centralized pharmacy hub designed for easy and rapid scaling. Once we establish a hub pharmacy in a market, we have historically been able to quickly deploy additional MedCenters to surrounding clinic providers. To date, we have 7 hub pharmacies across our key target states. Our most recent hub pharmacy opened in Orlando, Florida, in June of 2021 and notably, now services over 30 dispensing units across this market. A number of these SpotRx locations are associated with our partnership with IMA and is a great example of the land-and-expand strategy at work. Through our partnership with IMA, we opened 4 initial SpotRx locations at IMA sites in late 2020. And recently, we announced the expansion of our partnership to include all IMA medical centers across Central Florida. We opened 5 additional SpotRx locations at IMA sites late in 2021 and have deployed or begun installation for an additional 11 SpotRx locations this year. This rapid growth and expansion with the IMA network demonstrate how quickly we become an integral part of a medical center through our strong value proposition with SpotRx. We are also aiming to leverage our expansion with clinic partners and grow alongside them as they continue to build out their networks. Most recently, we expanded our partnership with Oak Street Health with an additional 2 SpotRx installations added in Michigan in 2021 and have agreed with Oak Street Health to deploy in Arizona with 3 initial contracted locations. A great example of how we can expand in 2 of our key target markets with existing partners to drive enhanced utilization of our existing hub pharmacy. Oak Street Health operates more than 100 comprehensive primary care centers across 19 states for senior adults. We are pleased to announce that we are also expanding our partnership with Cano Health. We had initially contracted with Cano to open 4 SpotRx locations in the Orlando area and contracted for an additional 4 locations in the Greater Los Angeles area in the fourth quarter of 2021. I am pleased to report that we recently contracted for an additional 9 sites in the Tampa, Florida area. We are looking forward to leveraging our new Tampa pharmacy hub for this opportunity. With these new deployments and expanding partnerships, we are continuing to build the foundation for scalable and sustainable revenue growth with large and growing value-based care providers. As we think about this growth, we look to deployment as a leading indicator of the strength in our momentum. We finished 2021 with 46 new deployments and momentum in the business. To provide some more context around deployment and how we are thinking about our growth, we want to introduce a new metric, dispensing MedCenters. Ramona will walk you through the details around our metrics, but at the end of 2021, we had 81 net cumulative deployments to date, 68 of which are dispensing MedCenters, representing 76% and 79% growth over the prior year, respectively. Importantly, we have also initiated internal measures intended to ramp up our deployments efficiently and effectively so that our partners can quickly realize the value proposition with SpotRx. Underlying all of this growth, we are heavily focused on the profitability of our business. We have programs underway in 4 areas to achieve improved margin: driving prescription volumes, optimizing our prescription mix, reducing cost of goods and improving reimbursement. We have set forth specific initiatives with respect to each of these areas. As a preview into one of these initiatives, we are deploying a comprehensive procurement strategy from sourcing products to drive utilization and the appropriate mix of medications using data and our pharmacy management system intended to ensure the highest available reimbursement for the prescription. We are also enhancing our leadership team, bringing in new talent and skills to drive these efforts, including most recently, the addition of an industry leader in data utilization and analytics to optimize and accelerate data exchange with our clinic partners and enable improved efficiencies for the benefit of our patient and clinic partners. We intend to use patient appointment data and prescriber data to optimize utilization of our MedCenters, which helps drive first fill adherence and patient satisfaction with the convenience of on-site dispensing. We exited the year with strong results. In the fourth quarter, net revenue was $7.3 million, representing 26% sequential revenue growth from the third quarter of 2021 and 135% growth year-over-year. Retail Pharmacy Services generated $6.8 million in revenue for the fourth quarter of 2021, representing 170% growth over the same period in 2020, while Pharmacy Technology revenues declined 24% year-over-year in the fourth quarter of 2021 to approximately $434,000. Pharmacy Technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise-level capital sales. We are intently focused on driving revenue in this segment, as we noted earlier. Looking ahead to the first quarter, we expect approximately $8.8 million in total revenue, representing 21% growth relative to the fourth quarter of 2021 and more than double our net sales compared to the same period in 2021. We also expect to see adjusted gross margin improvement in the first quarter of 2022 compared to the fourth quarter of 2021. In summary, while I'm still in the early weeks of leading our MedAvail team, we are enthusiastic about the differentiated value proposition and competitive advantage of our pharmacy solutions and the strong momentum we continue to deliver with our business. As you would expect, I'm spending my time on some immediate practical needs and on ensuring that we have the people and skills in place to drive the business forward. With this well underway as we continue to execute and deliver, I'm excited to spend time with this revitalized team to look beyond our immediate significant opportunities and update, refine and validate our strategy and plan for the future. We are also working to secure additional financing to move our various initiatives forward. I look forward to talking more about this in the months ahead. In the more immediate term, as we work to refine our operational initiatives, I am confident that we are strongly positioned with our expansion plans underway and more opportunities presenting themselves in our existing business areas while we focus on delivering profitable and sustainable growth in the future.

Thank you, Mark. Turning to our fourth quarter results. Net revenue for the 3 months ending December 31, 2021, was $7.3 million, a 135% increase from $3.1 million in the same period of the prior year. This was aided by a 170% increase in Retail Pharmacy Services revenue. As we've indicated in the past, Pharmacy Technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise-level capital sales. As Mark mentioned, we deployed 46 new MedCenters in 2021. At the end of 2021, we had 81 net cumulative deployments to date and 68 dispensing units, representing 76% and 79% growth over the prior year, respectively. I want to take a moment now to define these metrics. We have excluded the previously discussed non-revenue-generating sites from our deployment metrics such as pilot, decommissioned equipment and demo sites. We define dispensing unit as the sites that are live, that is have payer network acceptance, pharmacy board approvals and trained clinical staff or clinical account managers. Moreover, we work closely with state boards of pharmacy and our clinic partners to reduce the time to progress from deployment to becoming dispensing units, which generally takes 4 to 12 weeks. Gross margin for the fourth quarter of 2021 was negative 5% as compared to negative 7.9% in the fourth quarter of 2020. The negative margins were a result of inventory write-downs of $626,000 and $352,000 in the fourth quarters 2021 and 2020, respectively. The inventory write-down in the fourth quarter of 2021 was specific to the M5 model of our MedCenter within the Pharmacy Technology segment and is not related to the M4 models currently being sold to third parties and deployed within SpotRx. We now carry our M5 inventory at zero, given that we and our customers are focused on the M4 models. Without inventory write-downs in both the fourth quarters of 2021 and 2020, gross margin was 3.6% and 3.4%, respectively. Total operating expenses for the fourth quarter of 2021 were $12 million, a 5% increase from $11.4 million in the fourth quarter of 2020. Our operating costs have increased primarily as a result of our pharmacy operations and clinical account manager labor costs in support of additional MedCenter deployment. Notably, our general and administrative costs have stabilized quarter-over-quarter. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation and excluding nonrecurring expenses and other income to net loss was a loss of $10.9 million in the fourth quarter of 2021 compared to a loss of $8.9 million in the fourth quarter of 2020, reflecting growth in place. We ended the fourth quarter of 2021 with $19.7 million of cash and cash equivalents. We have a number of options we're actively pursuing to extend our runway. Turning to our outlook. For the first quarter of 2022, we expect approximately $8.8 million in total revenue. We expect 25 to 30 net dispensing units in 2022. Regarding our gross margin outlook, we remain focused on improving our adjusted gross margins and operating costs throughout the balance of 2022.

Thank you, Ramona. Thank you for joining the call today. We look forward to updating you on our progress as we continue to execute across our strategic initiatives and drive profitable growth. With that, we will now open it up to questions. Operator?

Our first question is from Charles Rhyee of Cowen.

It's actually James on for Charles. Previously, it's been noted that on average, each deployment generates about $1 million in revenue at full run rate. Can you give us an update on this revenue target? Are MedCenters deployed a year or more ago generating about $1 million in revenue on average? Maybe you can give us some color on what revenue looks like on a median basis, 75 percentile basis for those that have been deployed over a year ago?

Sure, James, this is Ramona. In the past, we have used net deployments as a leading indicator, but now we're focusing on the number of dispensing sites since these are the ones generating revenue and are linked to that $1 million target. Historically, for our mature sites, in the first year, we're typically seeing annual revenues of $200,000 to $250,000. In the second year, that increases to $500,000 to $600,000, and by the third year, it’s at $700,000 to $800,000. As of the end of last year, we had 68 dispensing units generating revenue, and we anticipate adding another 25 to 30 dispensing units in fiscal year 2022. In terms of qualifying new sites compared to the past, we believe these new sites are performing better than the median rate. Thus, we are targeting the 75th percentile, which would lead to hitting that $1 million mark in year 3. We are confident in the $1 million goal for site maturity, but I want to emphasize that there are factors affecting our revenue growth, such as the timeline for new or existing clinics. New clinics, referred to as de novo clinics, take longer to ramp up. Additionally, entering new markets may require time to get accepted into insurance plans, which can take a few weeks, usually between 4 to 12 weeks to be fully operational. Our revenue can also be influenced by clinic staffing and patient penetration rates. Finally, the average sales price is affected by our payer mixes and the types of prescriptions we are filling. We expect ongoing improvements in revenue ramp-up with the new clinics and our selection process. Some clinics are already generating over $1 million. Mark, could you elaborate on what we are doing to elevate the median rate towards the 75th percentile?

Sure. Thanks. I think the key to what we're seeing with the most recent clinics are our qualification process. So we're really selecting the right clinics that we go into, but we're also doing a much better job as we go live around our training, both for our clinical account managers as well as for the providers themselves so they feel comfortable in recommending our services. And then the last thing is we're using data more effectively once we're in market to both monitor the performance of the clinic itself and also adapt to the clinic such as the prescribing patterns, making sure that we have the right inventory in the MedCenter to capture the first fill dispensing.

Does that answer your question?

Okay. Great. Yes, that's very helpful. In the prepared remarks, I think you had mentioned that you're looking to ramp up sites more efficiently. Can you maybe give us some color on what you're doing to maybe accelerate or enhance this ramping process?

Yes. I think I'd go back to just the comments I just made similarly. I think we're really doing a better job in selecting those sites, right? And then the other thing is it's really the end market performance. And again, it's now using that data. We're starting to get appointment data so we know when patients are coming in to make sure that we're focused on those high-value patients for our partners as well as, like I said, making sure we have the inventory and stock to dispense the prescription while they're in the clinic at the point of care.

Okay. I mean, we appreciate you providing first quarter 2022 revenue guidance, but is there any color you could give on, I guess, revenue growth for the entire year or at least the key puts and takes we should be considering? Maybe some details on the progression of the 25 to 30 net dispensing sites would be helpful.

We're not providing full year revenue guidance at this time. That's why we shared information about the 25 to 30 dispensing units for the year, as that is how we derive revenue. This is similar to last year's deployment, which would increase our total dispensing units from 68 to approximately 95 to 100. We are continuing to assess the situation, and I am working with the Board to provide revenue guidance in a future update.

Okay. And similarly, I guess, sequential improvement expected in 1Q '22 on an adjusted gross margin basis. Should we think that margins sequentially improve throughout the course of the year? I know you're not giving full year guidance, but anything on that front would be helpful.

Yes. We finished the full year about 1.4% unadjusted with 4.3% adjusted. We do expect that those will continue to improve quarter-over-quarter. We're targeting between 8% and 9% adjusted gross margin within the next 4 to 6 quarters with our long-term goal being right around 15%, aligned with the industry average. We have a lot of initiatives that we're putting in place in 4 key buckets: utilization, mix, cost of goods sold, and reimbursement. And Mark, do you want to add some things that the team is working on?

I think you covered it really well. When you start to think about it and I said we're putting in sort of a full procurement strategy around how we buy at the lowest cost, but that we actually followed through making sure that our pharmacists are purchasing those items, dispensing those items and looking at how that rolls into the reimbursement that's coming in. I think the other thing we're very focused on is generic substitution, because generics typically will carry a higher gross margin, and that will help us achieve that 8% to 9% that Ramona spoke about. The last thing I would say on the mix is we do want to continue to drive technology sales, which has a much higher gross margin associated with it. And we'd like to get that to be a larger portion of our total revenue.

Okay. That's a good segue into my last question. On Pharmacy Technology, which seems to be a greater focus, I guess, what percent of total revenue do you think Pharmacy Technology ultimately could represent in the future? And maybe you could talk about what the sales pipeline in Pharmacy Technology looks like now, given the new sales leadership that you just hired?

Yes. Previously, the company discussed aiming for 20% in the technology revenue segment, and I believe that's a realistic target as we move forward. For 2021, we anticipate flat revenues compared to last year. For 2022, we expect revenues to remain flat as well. However, our sales pipeline will significantly strengthen as we complete our Epic integration. This integration consists of two main steps. First, we need our MedCenter app to be included in the Epic App Orchard, which we just received approval for in March. Second, we're collaborating with our first Epic partner to finalize an integration, expected to be completed by the beginning of Q3. This will allow us to target around 350 health systems, potentially leading to thousands of placements. Additionally, we have an integration with the McKesson enterprise system, which could also open up thousands of placement opportunities in retail. Therefore, we see both retail and health systems as viable channels for growth as we progress.

Our next question is from Brooks O'Neil of Lake Street Capital Markets.

I have a few questions. Following up on the previous question about pharmacy tech, do you expect those deployments to include a MedCenter unit in the end, or will it be solely a software sale?

Brooks, it's a good question. Always we'll have the hardware associated with it because the MedCenter is the platform for the dispensing. And then the software, as you recognize, we license the software with the MedCenter, and then we bill monthly for software and maintenance. So there'll always be a hardware component.

Okay. Cool. And then I'm just curious, were there any incremental terminations or reductions in deployment here either towards the end of the year or early in 2022?

No, there were not.

Okay. So would you say those units that are out in the field, you're either optimistic or you're pleased with the performance?

Yes. We're continuing to assess the performance of all the MedCenters inside of the SpotRx hub pharmacies that we run. And I would say that we are pleased with the MedCenters that are out in the field today, but we'll continue to monitor performance to ensure that we're maximizing the return from each MedCenter and each clinic.

Sure. That's great. So let me ask just one more. I'm curious what I hear in general, obviously, there are regional variations, but I hear that the impact of COVID has continued to decline, that there was quite a bit of impact in January but less in February and even less in March in most areas. And I'm curious if you can comment at all about how that's affected the utilization of the MedCenter pharmacy, and I'm thinking about it in terms of patients. Was there more in-clinic utilization? Was there more delivery, home delivery? Thinking about it in terms of the response you saw from the physicians that had access to MedCenters units. Was there any big change that you saw through the quarter? And do you expect any change as we move into the middle part of 2022?

It's a good question. I would say we didn't see a significant change in the existing MedCenters regarding first fill dispensing versus home delivery. However, since we launched Florida in the last six months, it has become a major part of our dispensing MedCenters, and we've actually noticed an increase in the utilization of MedCenters relative to the others. This has been a key focus for us, and we aim to keep optimizing the MedCenters by utilizing data from prescribers and our clinic partners to ensure we have the right inventory in place.

There are no further questions waiting at this time. So I'll hand the call back over to Mark for any closing remarks.

I just want to say thank you, everyone. Stay safe, and have a great night.

That concludes MedAvail's 2021 Fourth Quarter Earnings Conference Call. Thank you all for your participation. You may now disconnect your lines.