Myomo, Inc. Q2 FY2023 Earnings Call

Good afternoon, and welcome to the Myomo Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kim Golodetz. Please go ahead.

Thank you, operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo second quarter 2023 conference call. Earlier today, Myomo issued a news release announcing financial results for the three months ended June 30, 2023. If you would like to be added to the company's e-mail distribution list to receive future announcements, please register on the company's website at myomo.com or call LHA at (212) 838-3777 and speak with Carolyn Curran. With me on today's call from Myomo are Paul Gudonis, Chief Executive Officer; and Dave Henry, Chief Financial Officer. Before we begin, I'd like to caution listeners that statements made during this conference call by management other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, intend, guidance, outlook, confidence, target, project, and other similar expressions are typically used to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve certain risks and uncertainties and other factors that may affect Myomo's business, financial condition, and operating results. These and additional risks, uncertainties and other factors are discussed in Myomo’s filings with the Securities and Exchange Commission, including the Form 10-Q for the quarter ended June 30, 2023, and subsequent filings. Actual outcomes and results may differ materially from what's expressed in or implied by these forward-looking statements. Except as required by law, Myomo undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. It's now my pleasure to turn the call over to Myomo's CEO, Paul Gudonis. Paul, please go ahead.

Thanks, Kim. Good afternoon, everyone, and thanks for joining us. As we reported in our earnings press release, we had a very solid quarter with year-over-year growth in revenue and in all of our key operating metrics. More specifically, we continue to increase shipments of our MyoPro device and to build our patient pipeline for future revenue growth, now including Medicare Part B patients. We received the final license payment for our joint venture in China, which has enabled the launch of the business there. And most importantly, we had a significant positive development in our efforts to secure Medicare Part D coverage for our devices so that we can begin serving this large patient population. I'll start by reviewing the operational highlights during Q2 from the front end of the pipeline through delivery and revenue. Our direct-to-consumer marketing strategy of using TV advertising and social media to inform patients and family members about the MyoPro to restore movement in paralyzed arms is working very well. We added more than 400 medically qualified patients to the patient pipeline in the second quarter and these candidates are all covered by insurance plans that have paid for MyoPro in the past. Earlier this year, we began focusing on payers that have a track record of reimbursing for the MyoPro, resulting in what we believe is a higher-quality pipeline than in the past, and we're building it more efficiently with a smaller staff this year. We obtained authorizations and orders for 125 devices during the quarter, which is up 23% from the year-ago quarter. And with the shipments in payments we received, our product revenues were up 15% year-over-year. In addition to the product revenue, we repaid the final installment of the China joint venture, initial license fee of just over $1.7 million, bringing our Q2 total revenue to $6 million. We've been working on this joint venture for several years now and with the COVID-19 pandemic winding down and the resumption of economic activity in China, our joint venture partners were able to move confidently forward to fund Jiangxi Myomo, and we're now in the process of setting up manufacturing sales operations to serve the Greater China market. With an estimated 14 million people with paralyzed arms and 2.5 million new strokes each year, China represents the world's largest market opportunity for the MyoPro. We have a joint venture project team that's assisting in preparing the manufacturing infrastructure, establishing the supply chain for components and engaging rehab hospitals for distribution of the MyoPro to patients. We've sent a couple of our clinical specialists to China to train the JV staff and to demonstrate the technology to rehab hospital therapists. We've also received approximately $300,000 in orders for the clinical version of our product called the Mobile Arm Rehab Kit to be used for demos and training, and for the MyoPro control system, chips, and software, which will be used in the initial production run by the JV. The MyoPro control system order represents the initial purchase commitment under the guaranteed minimal payment provision of the JV contract. This contract provides for a total of $10.75 million in MyoPro control unit purchases over the next 10 years, and I want to note that these components are manufactured in the US as part of our IP space firmly with Myomo. On June 30th, the Centers for Medicare & Medicaid Services issued a proposed rule that, if adopted, would reclassify the MyoPro as a covered benefit in the brace category with a lump-sum payment. In addition, CMS stated its intention to post a fee for the MyoPro at an upcoming public community. This is a very significant development because it allows us to serve patients in the US who are covered by Standard Medicare or Part B and C for service, and would allow the MyoPro to be reimbursed similar to how all the other payers in the US currently pay for MyoPro. We currently provide the MyoPro to seniors under certain Medicare Advantage plans, and since half of seniors in the US are covered by Part B, our addressable market is poised to increase substantially. For those of you who are new to Myomo, here's a quick summary on Medicare. In January 2019, CMS established unique product billing codes effective for the MyoPro. However, CMS classified the MyoPro as Durable Medical Equipment or DME, which classified as a device paid on a monthly rental, with coverage on a case-by-case basis. While this opened up the large Medicare Advantage patient population to us, our position has been that the MyoPro is a custom fabricated device for long-term use and should be classified in this benefit category. Discussions with the CMS staff were delayed due to COVID. We were invited for a meeting at the CMS Public Hearing in June of 2022. At that presentation, we made significant points and have had follow-up meetings with the CMS staff and the Medical Directors of the DME MACs, the Medicare Administrative Contractors. The most recent of these meetings was this past April, where we presented compelling new research about patient outcomes and the value of the MyoPro for individuals of Medicare age. We are encouraged to file claims for Part B patients and have now treated six patients and submitted six claims for payment. These claims are under review at this time. It is unclear how the proposed rule will affect the processing of these claims submitted to the DME MACs before the publication of that proposed rule. So what's next? CMS is accepting public comments on this proposed rule until the end of August, and then they'll hold a Public Hearing on this topic as well as propose the allowable fee for our devices. While there's no specific timeline for implementing the new rule or holding a public hearing, the next hearing typically seems to be in the fall, and coverage and pricing go into effect sometime afterward. While I'd love to have a definite answer for you at this time, the process for the MyoPro to be covered as a powered arm brace is closer than ever to the goal line. In the meantime, we're not sitting still, as many Part B patients contact us each month about the MyoPro for paralyzed arms. We are proceeding to see these patients for medical eligibility and building a pipeline of Part B patients so that we can serve them after coverage and a fee are established. With that overview, I'll now turn the call over to Dave Henry, our CFO, for a more detailed discussion of our financial results and operational metrics. Dave?

Thank you, Paul, and good afternoon, everyone. To add to Paul's comments regarding coverage by CMS, if the proposed rule is adopted and the MyoPro is reimbursed by CMS on a lump-sum basis, the working capital required to grow our business to a level that supports cash flow breakeven is expected to be less than if the MyoPro were reimbursed as a rental. The reason for that is that under the proposed rule, we wouldn't have to wait 13 months to be fully paid by the manufacturing and patient provision costs that we would extend upfront. Turning now to our second quarter financial results. Total revenue for the second quarter of 2023 was $6 million. That includes revenue from the payment of the remaining initial license fee by our joint venture partner in China. As a result, total revenue was up 62% compared with the prior year quarter. Excluding that payment, product revenue of $4.2 million increased 15% year-over-year. This growth was driven by a higher number of revenue units, offset by a lower average selling price, or ASP. We recognized revenue on 97 units in the quarter, which was an increase of 21% over the prior year. ASP was approximately $43,700, down 5% from the prior year due to payer and channel mix. The direct billing channel represented 79% of revenue in the second quarter, compared with 83% in the prior year quarter. International revenue represented 12% of product revenue in the second quarter. The remaining 9% of revenue was from the VA and domestic O&P channels. Backlog represents insurance authorizations and orders received but not yet converted to revenue. Our backlog at the end of the second quarter 2023 was 179 units, up 10% compared with the end of the second quarter of 2022. We received 125 authorizations and orders for MyoPros during the second quarter, an increase of 23% compared with the prior year quarter. Our patient pipeline increased to 969 candidates at the close of the second quarter, up 27% from the prior year quarter. This has all been revised to reflect only known payers. We added 408 patients to our pipeline during the second quarter, an increase of 28% over the prior year. The year ago pipeline additions have also been revised to reflect only known payers. Gross margin for the second quarter of 2023 was 71.8%, compared to 65.3% for the prior year quarter. Excluding the impact of the license revenue, gross margin on product revenue was 60.5%, a decrease of nearly 500 basis points compared with the prior year quarter. The decrease was due to a lower ASP and higher inventory and warranty reserves. Operating expenses for the second quarter of 2023 were $5.4 million, an increase of 2% compared with the second quarter of 2022. The modest increase was driven primarily by a higher incentive compensation accrual, offset by lower advertising expenses, which decreased 18% compared with the prior year quarter. We're on pace to spend roughly $1 million less on advertising in 2023 versus 2022, which is part of the $2 million in annual OpEx savings we're expecting for the year. Our cost per pipeline ad decreased to $2,074, down 57% compared with the prior year quarter. As a result of the license revenue, operating loss for the second quarter of 2023 was $1.1 million, compared with an operating loss of $2.9 million for the second quarter of 2022. Net loss for the second quarter of 2023 was $1 million, or $0.04 per share. This compares to a net loss of $2.9 million, or $0.42 per share for the second quarter of 2022. Note that the $6.8 million prefunded warrants issued in our January 2023 offering are considered common stock equivalents under GAAP and are included in our weighted average shares outstanding. None of the prefunded warrants have been exercised as of today. Adjusted EBITDA for the second quarter of 2023 was a negative $0.8 million compared with a negative $2.5 million for the second quarter of 2022. To summarize our year-to-date results, revenue for the first six months ended June 30, 2023, was $9.4 million, up 25% compared with the same period a year ago, while year-to-date product revenue of $7.7 million was up 17%. Year-to-date gross margin was 70.1% compared with 66.0% in the year ago period. Year-to-date gross margin on product sales for Q2 of 2023 was 63.4%. Operating expenses for the first half of 2023 were $10.4 million, a decrease of 2% compared with the same period a year ago. Operating loss for the first six months of 2023 was $3.8 million, compared with an operating loss of $5.6 million for the same period a year ago. Net loss for the first six months of 2023 was $3.7 million or $0.14 per share compared with a net loss of $5.7 million or $0.83 per share for the same period a year ago. Adjusted EBITDA was a negative $3.2 million for the first six months of 2023 compared to a negative $4.9 million in the year ago period. Turning to our cash position, cash, cash equivalents, and short-term investments as of June 30, 2023, were $9 million. Cash used in operating activities was $300,000 for the second quarter of 2023 compared with $2.6 million for the prior year quarter. The reduction was driven by the license payment and cash generated by changes in working capital, primarily due to an increase in incentive compensation liabilities. Looking ahead, while our backlog entering the third quarter is higher compared with the prior year quarter and is slightly higher sequentially, the potential ASP in the backlog was lower due to payer mix. As a result, we believe that slight year-over-year revenue growth is attainable while sequential revenue growth will be challenging. Our ability to deliver product revenue in 2023 that meets our target of 20% to 30% year-over-year growth will depend on the number of insurance authorizations and orders we receive over the next few months. With that financial overview, I'll turn the call back to Paul.

Thanks, Dave. While I hope we've conveyed our readiness to spring into action once Medicare Part B becomes a reality for us while continuing to demonstrate excellent progress with the business in the meantime. So with that overview, we're now ready to take your questions. Operator?

We will now begin the question-and-answer session. The first question comes from Ben Haynor of Alliance Global Partners. Please go ahead.

Good afternoon, gentlemen. Thanks for taking questions and congrats on the development over at CMS. First off for me, if I do the math correctly, it looks like the pipeline drops improved pretty impressively from the prior quarter. Is there anything that you attribute that to? Is it just noise or is it an improvement in the metrics from the virtual waiting room that you implemented, or what would you ascribe that to?

Well, Ben, thanks for your comments. Within our Department of Patient Advocacy, we now have a role called patient navigator, and these individuals are working with these patients, following up with their physicians and therapists, acquiring the necessary medical documentation. I think that increased engagement with these patients is paying off by having more patients continue to go through the process to obtain their MyoPro.

Okay. Got it. Sounds interesting. And then on the 30 Medicare Part B patients you've added to the pipeline, are those kind of newly acquired patients or are you kind of reactivating some folks that may have contacted you in previous periods and expressed interest in the MyoPro?

Yeah, most of these are new prospects that contact us because, with our advertising, we get a lot of calls or lead forms filled out on our website. We typically have hundreds of Medicare Part B patients contact us, and in the past, we've had to put them on hold saying we'll give you an update when we have more information from CMS for coverage. But now we can tell these patients, if you're interested, let's do a telehealth screening. Go to your physician, get a written order so that when we do get coverage by Medicare, we can start to serve you. So, these patients are contacting us every month. And now we can start to build this pipeline in anticipation of being placed into the correct benefit category.

And to be clear, the patients that are in the Medicare pipeline, that's separate from the 969 patient pipeline. We're keeping track of that separately for now, and we're looking to obviously grow the size of that pipeline in the third quarter.

Is that something you intend to break out in the future, or will that come together as, hopefully, this benefit category change occurs?

Yes, it will come together eventually, but for now, sorry. It'll come together eventually, but for now, we'll keep it separate.

Okay. Got it.

Yeah, that's right. Eventually, Medicare Part B becomes another good payer like the other plans that we're working with.

Okay, perfect. And then, lastly for me, kind of a clarification, you mentioned the 300,000 orders for the MARK clinical units, and maybe I missed this. Did those ship in Q2, or is that something that's going to occur later this year or has occurred in Q3?

That'll occur during the second half of this year.

Okay. Got it. Well, thanks for taking the questions, guys. That's it for me.

All right. Thank you.

The next question comes from Scott Henry of ROTH Capital. Please go ahead.

Thank you, and good afternoon. I think I'm just going to dig in a little deeper on the CMS situation to get a better understanding of exactly what it means and how it could impact the model. I guess for starters, if you convert CMS to being a lump sum payment versus rental over a period of time, do you expect the total amount to be significantly higher or the same? I wouldn't expect it to be less, but yeah how should we think about that amount and what direction do you see it going?

It all depends on the fee they charge. Generally speaking, the DME MACs will apply a roughly 5% increase to survival payments to account for the time value of money compared to a lump-sum payment. However, under Medicare rules, you can't bill the patient for a rental if they aren't using it for any reason. Therefore, if we were under the rental reimbursement model and a patient experienced a health issue that prevented them from using the MyoPro, we wouldn't be able to bill for it. In such cases, it would be possible that we couldn't recover the full 13 months of rental payments. Overall, I believe receiving a lump sum is financially more advantageous for us than being reimbursed on a rental basis.

Okay. So it sounds like conceptually, it's the same but significantly better terms. Is there a way to get higher payments from this process, or is that something that happens over time or can sometimes go lower over time? Just trying to get a sense about it?

Yes. We expect that our expectation would be that the fee that Medicare ultimately sets is going to be lower than our ASP now. How much lower we have no idea. Other than that, anything else would be pure speculation.

Okay. All right. That's fair. Now, what is the difference between L8701 and L8702?

L8701 is the MyoPro W, which is just the elbow and the wrist, while L8702 is the elbow, wrist, and the hand, the grasp unit. That is reimbursed at a higher rate.

Okay. Excellent. Now the other question I had is, obviously, you're going through the CMS path in one avenue, but you're also talking to the DME MACs. Are those separate processes, or how do those two events tie together?

Well, the link is that the DME MACs contractors, these medical directors, work for CMS. CMS staff directed us to meet with the medical directors, which we did in April, presenting new research that is in the process of being published from our patient registry of several clinical studies showing the value of the device for the Medicare-age population. The CMS takes those recommendations from the DME MACs medical directors in making their assessment of whether to cover the device or not. So it's an integral part of the process and we had a good meeting in April. Then in June, CMS came out with this rule that says there's value in power devices and these should be included in the brace category, which is a current benefit category.

Okay. So those six specific filed claims, can they get paid out before this process concludes, or do they wait in the queue until all of this plays out at the end of the year?

Yes, we're not sure. We filed those claims with the medical documentation. They might start getting paid now as rental. And then when CMS puts out the rule and pricing as a lump sum, they may shift at that point. I don't know until we see what happens.

Okay. Yes, there's a lot of moving parts, I'm just trying to understand it all. As far as timeline, I mean, it sounds like let's say they publish this at the end of 2023. When does the spigot get opened up? When can you start getting patients in this category?

Yes. So they have no specific timeline, but if they do publish the rule by the end of the year, it's combined with the home health rule which usually goes effective by January 1. Then the question is, when do they publish an allowable fee? Typically, CMS has these meetings twice a year. They will usually publish a proposed fee in the meeting agenda a few weeks ahead of the meeting, which will probably take place at the end of November or early December. Should they publish a price, we will provide comments on it as well as others, and then they can make their decisions to publish it in the ultimate numeric code set. It could go effective January 1 or could be effective 90 days later in the next quarterly update.

Okay. All right. So this is something we'll continue to track. My understanding is the benefit is among seniors; it potentially doubles the market without any additional effort from you from a selling perspective. It brings some economies to the business model. Is that a fair way to think about it?

Yes, that's an accurate perspective because the advertising and lead generation efforts we are implementing are prompting those Part B patients to reach out to us. This does not incur any additional advertising costs. However, there are other expenses associated with following up with these patients, communicating with their physicians, and collecting their medical documentation, which is necessary to qualify these patients. Another advantage is that many commercial plans tend to adopt Medicare's decisions. Some Medicare Advantage plans currently cover the MyoPro, while others do not require us to go through an appeals process. If it is covered by Part B, they are legally obligated to cover the MyoPro as well. Consequently, many Medicare Advantage seniors will now have access to the MyoPro for the first time, leading to a significant expansion of our addressable market.

Okay. Great. That should do for me. Congratulations on that progress, and thank you for taking the time to walk through it.

Thanks, Scott.

The next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Thank you. So at the end of the second quarter or right at this point in time, how many sales reps do you have right now?

Well, we don't have sales reps, as you might say, like go-to-market for implantable medical devices. We have a call center about 10 people based in Texas, following up with prospects and family members that contact us. We have another 10 certified process orthosis clinical professionals, licensed professionals around the country, following up with the patients to conduct evaluations when we get an authorization. So we don't have a typical sales force like you might think of like a Boston Scientific device.

So these 10 people at the call centers and the 10 orthotists, are they full-time employees or 10-99s or how does that work?

They're full-time employees.

Okay. Were any of them added during the second quarter, or have you already staffed for the anticipated ramp this year?

We added one new certified orthotist in the Midwest in the second quarter. And so we're staffed for right now. We believe we can handle with this team an incremental volume increase for the Part B patients, but eventually as the Part D volume ramps up, we'll have to add more clinicians in the field as well as more people in our customer experience.

Okay, what is your anticipated timeline for hearing back from the MAC regarding when the brace will be approved for reimbursement?

Yeah, it's a good question. So right now, the proposed rule was published at the end of June. There's a 60-day comment period closing on August 29, then our CMS staff and Medicare staff will review those comments. They could issue a final rule-making anytime after that. So it could happen this fall, although they may push that out. We are hoping they will do it this fall because. As for publishing the fee, as I mentioned to the earlier question, they usually publish a proposed fee in the semiannual agenda, and after comments, that fee can go live as early as January 1, but it could be sometime in 2024.

Okay. So if things go well, they'll review it after the comment period on August 29, then will come up with a proposed fee in the fall, which could go live January 1, 2024, but if not, 1/1/24, then hopefully sometime in 2024?

Yeah. That's correct.

Okay. I agree. I will hop back in the queue. Thank you.

The next question comes from Edward Woo of Ascendant Capital.

Congratulations on the quarter. Can you provide some comments on how your European business is doing? Is it doing as well as the US business? Have you guys thought about expanding outside of Germany?

The international business is growing. As Dave reported, it's 12% of our revenues. We've been adding business development managers and a few critical trainers in Germany. We have about 100 prosthetic clinics that have signed on to distribute the MyoPro in Germany. We focused on Germany because we're making good progress on reimbursement with payers, statutory health insurance coverage there. When we have to appeal a denial, we're getting good responses from the social courts in Germany directing the payers to pay for the MyoPro. Our advertising approach there is working as social media has been gaining traction as well. We decided to focus on Germany because, again, it's a large market with 80 million population, good reimbursement, and a lot of need. Rather than make the investments in opening up other markets, which should take two to three years to get reimbursement and build the distribution channel, we said, let's double down and bring the MyoPro to more patients in Germany.

Yes. The other geography we're seeing benefits from is Australia. It's certainly not as large as Germany, but we're starting to have patients approved through the National Disability Insurance Scheme in Australia for the first time. I think there is an opportunity, we have a channel partner in Australia that we work with. There's potential to see more revenue from that geography as well.

That sounds good. Are you guys in Canada at all?

We have a medical device license to distribute in Canada. We've signed up a couple of O&P clinics there. I know they are evaluating some patients and working through the Canadian social insurance system to get their initial reimbursement. No orders in there yet, but I know we have a couple of patients in the O&P pipeline.

Say, Dave doesn't move too far from the board or you should send them over one of these days. That's all the questions I have.

Thanks, Ed.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Gudonis for closing remarks.

Well, thanks, operator. I just want to mention to everyone, we're available for virtual and in-person investor meetings. Please contact LHA Investor Relations to set up a time. Of course, we'll keep you informed about developments at CMS and our status for the Medicare Part B patients. Just before we sign off, I want to remind you that we're very excited about Myomo's future beyond the Medicare opportunity we've discussed today. We've got a compelling proven advanced technology product that addresses large market opportunities. As you can see, we are improving our operational efficiencies across the board with pipeline revenue growth and managing our operating expenses. Our international sales are growing as we discussed. We expect ongoing contributions from our joint venture in China, and we continue to make product design and business processes adjustments to operate more efficiently as we scale the business. Thank you for your continued interest in Myomo and have a good day, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.