Myomo, Inc. Q3 FY2023 Earnings Call

Hello, and welcome to the Myomo Third 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 this afternoon, Myomo issued a news release announcing financial results for the three and nine months ended September 30, 2023. If you would like to be added to the company's email 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 and are subject to 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 September 30, 2023, which is expected to be filed in upcoming 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. We have a lot of news to cover with you today, starting with our third quarter financial results and then last week's updates from the Centers for Medicare and Medicaid Services (CMS) about the MyoPro for patients with Medicare Part D coverage. Today, we're reporting third quarter financial results featuring more than $5 million in product revenue for the first time, which is up 28% year-over-year and up 20% sequentially. This included a record quarter of international revenues, which topped $1 million in a quarter for the first time. Importantly, we are entering the fourth quarter with 1,046 qualified patients in our pipeline, and more than $11 million in cash, which gives us optimism about our growth trajectory. I'm pleased with these results since they validate the strategic shift and the operational changes we implemented at the beginning of the year. We decided to focus on patient candidates who had insurance coverage by payers with a track record of reimbursing for the MyoPro rather than expending a lot of effort to obtain pre-authorizations from other insurance plans. That's led to a higher authorization rate by payers, including on appeal with some approvals happening within a few days of submission of the medical documentation to the insurance company. Assuming medical necessities demonstrated, Medicare Advantage plans, which cover many of these stroke survivors or seniors age 65 and up, must provide coverage if CMS is reimbursing for the device. Along with this focus on reliable payers, we reduced our operating expenses by having fewer staff dedicated to reimbursement activity and by cutting our marketing budget by $1 million. These cost savings, along with the increased revenue we've generated, are allowing us to reduce our cash utilization year-over-year as we work through the timetable of having the Medicare Part B rulemaking and the coverage completed. For a deeper dive into our third quarter, I'll start with the top line. Year-over-year and sequential growth in product revenues is due to three factors; one, the size of the patient pipeline, which was nearly 1,000 qualified candidates at the beginning of the quarter, meaning they were covered by insurance plans that had consistently paid for MyoPro in the past; two, the number of units in our backlog, which represented approximately $7 million of potential revenue upon delivery or collection of payment from the payer; and three, the number of new orders received and filled during the quarter for revenue based on the payer mix, what we call the fill units, which was a record number in the quarter. During our last quarterly conference call, I was a bit conservative about our revenue forecast, because we had limited visibility into how many insurance authorizations we would receive and what the payer mix might be. As it turned out, we had a record 156 authorizations and orders in the third quarter, which is up 20% from the year-ago period. And we achieved this growth with the 27% reduction in advertising spend compared with the third quarter of 2022 and a 12% reduction in staff engaged in reimbursement activities back in January as we focused our efforts on payers with a track record of reimbursing the MyoPro. And now for the major news updates, it was a remarkable week for seniors with Medicare Part B fee-for-service health insurance as CMS issued two publications concerning the MyoPro brace for patients with muscle weakness in paralyzed arms. On November 1st, CMS stated that it was reclassifying the MyoPro in the brace benefit category as we had requested in the public meeting in June 2022 instead of the original durable medical equipment (DME) rental category. The MyoPro product line is custom fabricated for each patient and is designed for long-term home use by Medicare beneficiaries. In the brace category, the MyoPro will be reimbursed by Medicare on a lump sum basis, which is the way all other payers, Medicare Advantage, the VA, and commercial plans reimbursed for our devices effective January 1, 2024. That was good news, number one, for Medicare beneficiaries. Then on Friday, November 3rd, CMS issued the agenda for its upcoming HCPCS Public Meeting, which included the publication of proposed fees for the two MyoPro models. The MyoPro Model W, which is the elbow-wrist orthosis coded as L8701, the proposed fee is $31,745. For the MyoPro Model G, which is the elbow-wrist-hand orthosis, the proposed fee is $62,457. These fees are calculated by CMS based on their internal pricing methodology and are consistent with the presentation we made at their June 2022 public hearing. These fees will be considered at the November 29th CMS public meeting and typically determinations resulting from a public meeting are published a couple of months later and are effective in the subsequent calendar quarter, which in this case would be April 1, 2024. However, there is no guarantee that these will be the fixed fee amounts, the final fee amounts, or what the effective date will be. While we're waiting for these decisions by CMS staff, we were instructed to present our latest clinical research to the DME MAC Medical Directors, which we did this past spring. We are also advised to provide devices to Medicare Part B beneficiaries and to file claims for payments. I'm pleased to report that we've now had five Part B claims approved and have received initial rental payments under the current HCPCS codes, which is the first time we've received such payments since our codes went into effect in January 2019. We received multiple monthly rental payments on several of these claims, and importantly, all four of the DME MAC regions have paid for the patients' MyoPro. One additional MyoPro claim is still in process with the clinical documentation in support of medical necessity still under review. Why all this is significant for Medicare beneficiaries and the company is that Medicare Part B patients should now have access to the MyoPro based on medical necessity and any coverage guidelines that may be issued. We plan to put these Part B patients on hold until now. So going forward, we'll be able to work with their physician and supply our powered braces to suitable candidates. We commend CMS on making these braces available to seniors with Part B coverage, as it is a major step towards the goal of health equity. I'll wrap up my opening comments with a few other highlights. Our international operations led by Germany achieved a record $1 million of revenues in Q3. We have a growing pipeline of patients interested in MyoPro, a network of 100 O&P clinics across Germany who can provide the MyoPro, and more wins at the German social court that has ruled in favor of patients having access to a MyoPro and requiring the payer to cover the cost of the device due to medical necessity. Our Chinese joint venture company made good progress during the quarter, as medical device registrations were submitted to allow the sale of the market units or the Mobile Arm Rehabilitation Kits to rehab hospitals in China, which would be initially used for rehab training purposes for which the hospitals could generate revenues. In addition, first prototype market units are expected off the production line during this fourth quarter. Sales of the MyoPro individual patients will occur further down the road when the regulatory body approves the device for home use; we just don't know the timing of such approval at this stage. We completed our second capital raise this year in August at an 80% premium to the price of our equity offering back in January. I have publicly committed to reducing our cash burn this year while growing the business and working toward Medicare coverage of the MyoPro. Year-to-date, our cash used in operations is $3.8 million less than half the burn compared to the cash used in operations of $7.8 million for the same period in 2022. I'll now turn the call over to Dave Henry, Myomo's CFO, to review our third quarter financial results. Dave?

Thank you, Paul, and good afternoon, everyone. Turning now to our third quarter financial results. Total revenue for the first quarter of 2023 was $5.1 million. This consists entirely of product revenue, which is a record for the quarterly product revenue, and was up 28% over the prior year quarter. This growth was driven by a record 119 revenue units, offset by a lower average selling price (ASP). The 119 revenue units in the quarter was an increase of 37% over the prior year. Of the 119 revenue units, approximately 40% resulted from fill, which is our term for authorizations and orders received and converted to revenue in the same quarter. This was a record number of fill units, which was aided by the addition of two insurance payers and their affiliates for which we have accumulated sufficient collection history to enable revenue recognition at the time of MyoPro delivery. Nearly half of our direct billing revenue in the third quarter was from patients with payers where we were able to recognize revenue at delivery. ASP was approximately $42,700, down 7% from the prior year, as we guided, due to payer and channel mix. The direct billing channel represented 69% of revenue in the third quarter compared with 77% in the prior year quarter. International revenue represented 20% of product revenue in the second quarter. The remaining 11% of revenue was from the VA and domestic O&P channels and sales of demo units and MyoPro control units to the JV company in China. Backlog represents insurance authorizations and orders received but not yet converted to revenue. Our backlog at the end of the third quarter of 2023 was 185 units, which is up 1% from our backlog at the end of the third quarter of 2022. This backlog includes five patients for whom we are receiving rental payments from the DME MACs. We received 156 authorizations and orders for MyoPros in the third quarter, an increase of 20% compared with the prior year quarter. Our patient pipeline increased to 1,046 candidates as of September 30, 2023, up 28% from the year-ago quarter, which has been revised to reflect only known payers. 381 patients were added to our pipeline during the third quarter, an increase of 22% over the prior year. The year-ago pipeline additions have also been revised to reflect only known payers. Note that the pipeline does not include Medicare Part B patients, which we're tracking separately for now, but we made progress growing the Medicare Part B pipeline in the third quarter. Gross margin for the third quarter of 2023 was 68.7% compared with 66.5% for the prior year quarter. The increase was driven by improved fixed cost absorption on the higher volume offset by a lower ASP. Operating expenses for the third quarter of 2023 were $5.5 million, an increase of 1% compared with the third quarter of 2022. This modest increase was driven primarily by higher incentive compensation accrual, offset by lower advertising expenses, which decreased 27% compared with the prior year quarter. We're on pace to spend roughly $1 million less on advertising in 2023 than we did in 2022. Our cost per pipeline ad was $2,159, which is down 36% compared with the prior year quarter. Operating loss for the third quarter of 2023 was $2 million compared with an operating loss of $2.8 million for the third quarter of 2022. Net loss for the third quarter of 2023 was also $2 million or $0.06 per share. This compares with a net loss of $2.8 million or $0.40 per share for the third quarter of 2022. Note that the $8.7 million prefunded warrants issued in our January and August 2023 offerings 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 third quarter of 2023 was a negative $1.7 million compared with a negative $2.5 million for the third quarter of 2022. To summarize our year-to-date results, revenue for the nine months ended September 30, 2023, was $14.5 million, up 26% over the same period a year ago, while year-to-date product revenue of $12.8 million was up 21%. Year-to-date, gross margin was 69.6% compared with 66.2% in the year-ago period. Gross margin on product sales for the nine months ended September 30 was 65.5%. Operating expenses for the first nine months of 2023 were $15.9 million, a decrease of 1% compared with the same period a year ago. Operating loss for the first nine months of 2023 was $5.8 million compared with an operating loss of $8.4 million for the same period a year ago. Net loss for the first nine months of 2023 was $5.7 million or $0.21 per share compared with a net loss of $8.6 million or $1.24 per share for the same period a year ago. Adjusted EBITDA was a negative $4.9 million for the first nine months of 2023 compared with a negative $7.4 million for the year-ago period. Turning to our cash position, cash, cash equivalents, and short-term investments as of September 30, 2023, were $11.1 million. Cash used in operating activities was $1.7 million for the third quarter of 2023 compared with $2.8 million for the prior year quarter. Looking ahead, our backlog is up modestly on both a sequential and year-over-year basis. Assuming a typical quarter where fills are in the range of 30% to 35% of revenue units, we believe we are positioned to deliver year-over-year revenue growth in the fourth quarter and full year product revenue growth consistent with the growth through the first nine months, which is within the 20% to 30% range we guided to at the beginning of the year. With that financial overview, I'll turn the call back to Paul.

Thanks, Dave. While we're looking to continue the momentum we've achieved so far this year, we expect to add additional medically qualified Medicare Part B patients to our pipeline in the fourth quarter, so that we're ready to serve this population after the new brace category rule and the fees go into effect. With that overview, we're now ready to take your questions. Operator?

We will now begin the question-and-answer session. Operator Instructions

Before we take the first question, I just want to mention that we are available for virtual and in-person investor meetings, so please contact LHA Investor Relations to set up a time. We'll also keep you informed of developments at CMS and about the status of the new brace category classification and the proposed fees, which will enable access to MyoPro by Medicare Part B patients. Okay. Operator, we're ready for the first question.

Thank you. Good afternoon, and congratulations. Some very well-deserved progress on the reimbursement front, so great job. A couple of questions. I guess, first, when I look at the CMS fees for, I believe, it's the G and the W, I typically think of this as 35,000, 40,000 ASP. So that 62 kind of looks higher, is that just a blend? Or how do we think about that 62 in there?

Yeah. Well, CMS has its own methodology for calculating fees for new medical devices, and they're required to follow the guidelines using the published retail pricing. So Myomo's ASP that we currently report is not the retail price, but it's a value affected by accounting calculations and other factors. And the ASP that we currently have is typically lower than the actual retail pricing. But Scott, CMS has its own algorithms, what they call the Gap filling methods, where they take retail pricing, they back it up over a period of time and then they add inflation, and that's where they come to these pricing, which is consistent, by the way, with what we presented at the June 2022 public hearing.

Okay. So it sounds like it's within your expectations and you're probably pleased with the levels there. Is that correct?

Yes. It's again, it's consistent with what we have presented. And it's very workable to enable access for these Part B beneficiaries.

Okay. Great. And I noticed you changed the patient pipeline update. Have you included Germany in the past? Or is that new? And what was the driver? Is Germany likely going to be a material market for you, just curious on that.

Yes. Well, go ahead, Dave.

As I say, no, Germany has always been included in the pipeline. I think the, over the last couple of quarters, we've seen the drop rate in the pipeline decreased a bit, and I think that's helped grow the overall pipeline because the ads have been in that $380 million to $400 million range this year as we've been spending a consistent amount on advertising each and every quarter. So I think that's what you're seeing from the pipeline is that we are seeing fewer patients right now dropping out.

Okay. Great. Final question. $5 million in a quarter, congratulations. That's a strong number as well, you have the 156 orders and authorizations. When we put all that together, the question is, how do we think about cash flow breakeven, not necessarily GAAP breakeven, $7 million in a quarter? Do you think that gets you pretty close to breakeven? It seems like we're starting to get into that ballpark. I appreciate any color on that. Thank you.

Yes. I'd like to sort of defer that answer. I'd like to see what the final fee is published from CMS. And with the public meeting at the end of November, determinations from that meeting should be out by the end of February 2024. And so by the time we get to our first quarter, I should say, fourth-quarter conference call in March of 2024, we might have a better idea and might be able to provide some more color on that.

Okay. Fair enough. Thank you for taking the questions.

Thank you, Paul and Dave. Regarding the meeting on November 29, who will be attending and what are the expectations following that meeting? Will the payment determination be finalized then, and is implementation expected to start on January 1, 2024?

So the public meeting is held twice a year. And CMS just published the agenda, which is available online. And the agenda includes pricing for a number of products, including ours. We're right on the agenda item number one with this proposed pricing. So attendees or anyone that wants to submit comments about the proposed pricing or anything else about our product or anybody else's product that are in the agenda. And then after CMS reviews any of those comments, they will typically come out with their final fees and put that into what we call the alphanumeric tables. Usually, this takes them a couple of months. So we don't expect the fees to go into effect until perhaps April 1st, maybe earlier than that, but that's our current expectation.

Okay. So you're saying April 1st, and if it's earlier, great, but that April 1st is the expectation. And then just in terms of revenue recognition, does this change any of your revenue recognition expectations for 2024? Or was this built into what you were expecting?

I think as we, if CMS publishes a fee and we start getting regularly paid that fee, then we will, our expectation is that we'll be recognizing revenue at delivery for Medicare Part B patients once we can establish collectibility, which is the requirement under GAAP. We're going to be under, our products will likely be reviewed under what's called individual consideration, so on a case-by-case basis. And we'll see as we go forward in 2024 how they're paying. And then once we feel comfortable, our auditor's comfortable, then we'll go ahead and start recognizing revenue and delivery.

Okay, Dave. Based on my experience, I've found that auditors generally prefer to see a full year of establishing collectibility. Is that what you expect, or do you think it could take less time?

When we establish collectibility for, or the insurers that I mentioned in my remarks, it was really based on more of a number of patients. And time wasn't necessarily a factor. It was seeing a number of patients where if we get an authorization and we bill a claim and deliver, we get paid. We see that happening enough times regardless of time that would be the point at which we feel we can take revenue at delivery.

So more based on number of patients? And do you have a range of what you think that number would be, or hard to say at this point?

I mean it's, I mean, I would say it's got to be a few dozen certainly.

Okay. Okay. And then based on all the good news in November, on November 1st, CMS published the final rule that reclassifies the MyoPro as a brace, and now this. Do you feel like the total addressable market (TAM) for the MyoPro has increased in terms of what it was maybe prior to November?

It’s at least double, Anthony, because if you look at the majority of the stroke population are seniors, about 50% of seniors are covered by Medicare Advantage plans and 50% of seniors are on the standard Medicare Part B. And we've only been able to serve that Medicare Advantage population until now. And so with these Part B patients, if they're medically eligible for the device, that's half of the senior population. So the way I look at it is, effectively, our TAM has doubled.

Okay. That's helpful. All right. Great. Thanks very much. I'll hop back in the queue.

Yes. Congratulations on the quarter and especially on international. Should we expect that the high growth rates in Germany will continue? Is there any possibility that it could increase even faster? What about potentially expanding beyond Germany and into the rest of the EU?

Well, we've been really pleased with the consistent year-over-year growth in Germany. As I said, it was a record quarter here recently in Q3. We've been building up the distribution network. We've been very successful in getting statutory health insurance payers to cover this. So we can expect we'll have continued growth there in Germany. We're looking at other markets, especially in EU, where we have CE Mark, and we meet the EU MDR rules. Now the question will be reimbursement. It often takes a year or 2 to establish reimbursement in some new markets, and so right now, we're basically doubling down and saying, look, Germany is a big country, over 80 million population. So let's keep serving the patients in Germany right now as our first priority for Europe.

Is there a possibility to push to gas pedal a little faster to take advantage of the opportunity in Germany? Or do you feel like you're at a very comfortable pace?

Well, we've had a good growth clip over there. It requires more marketing spend, more business development staff, more clinical trainers and so on. So we want to go at a good pace, but also do it in a quality manner because we want to make sure we're medically qualifying patients, getting all their documentation and following up for good outcomes. So, we'll continue to see a good pace of growth there in Germany.

Great. Well, thank you and congratulations again.

Thank you.

Good afternoon, gentlemen. Thank you for taking the questions. First, I would like to know about the distribution between the MyoPro Motion W and Motion G in your typical quarter. Do you anticipate any differences with the Part B population?

Over 90% of our orders are for the MyoPro G. That's the more expensive unit because it includes the glass, which enables greater functionality for activities of daily living. We expect a similar trend for the Part B population as well as other seniors.

Okay. Great. And then on the payers that may not be covering MyoPro, would you expect them to kind of fall in line now that Medicare has made these changes or CMS has made these changes?

We expect that, that will happen over time. Certainly, Medicare Advantage plans are required to provide whatever Medicare standard Part B does. So we think that will open up additional Medicare Advantage plans to the MyoPro. And then as you are aware, often commercial plans will follow what Medicare does as well. So over time, we'll be having meetings with various medical directors of these plans, the commercial side as well about contracting. But certainly waiting for this Medicare Part B sort of blessing, I think it was very important for the overall reimbursement strategy with these other payers.

Okay. That makes sense. And then on the Part B patients that you have in your database right now, I guess this maybe is more of a mechanics question. But when might you start including those in the pipeline? Is that something that you just close to investors? Is that something that we would probably look to hear about kind of in the Q1 report? Or could it be after that? What's the right way to think about that as you look at it today?

Yes, I think that's a good question. I think after everything gets finalized at CMS, the price category rules in place, these are published and so on, and as we continue to build up a patient pipeline of Part B patients, we can be discussing that as well at that time.

Okay, got it. And do you think you go and expand the team given these updates, the benefit category change, the proposed fee schedule? It seems like there's a lot of opportunity for you to go after if this falls into place like it looks like it's going to. Any thoughts on that front?

Well, we've already been working on how do we scale up the business cost-effectively. We've got some core infrastructure with about 110 people now inside the company. But certainly, to gear up for the additional volume, we're going to need additional manufacturing staff, maybe a second shift in our current facility, lest the order additional inventory for the builds. We'll have to add additional clinical staff in the field, whether it's the CPOs that do the evaluations and fittings or the mild care coaches that follow up. So yes, we've been working on a plan, but we should get operating leverage because we've already invested in the core infrastructure of the team.

Okay, got it. That's it for me, gentlemen. Hello start to November?

Thanks, Ben.

Since there are no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Paul Gudonis for any closing remarks.

Thanks, operator. I want to thank the new investors that participated in our capital raises this year. We've been able to attract well-regarded fundamental health care investors who see the long-term potential of this business where we've had a number of executives and Board members also increase their stock holdings. And while forecasting quarterly revenues is always a challenge due to the factors I mentioned earlier, such as the number and the timing of insurance authorizations and the payer mix, we are poised for our 11th consecutive year of revenue growth. We continue to add roughly 400 new candidates into our patient pipeline each quarter, and we entered Q4 with a record number of patients in the pipeline, and we'll be including Part B beneficiaries as we go forward. So we're looking forward to the finalization of the CMS fee schedule and MyoPro in the brace category with an anticipated effective date of the ability to expand our addressable market to include almost 50% of seniors in the US with standard Medicare Part B coverage, a growing international business, especially in Germany and China, and scaling the business with operational efficiencies so that we can achieve cash flow breakeven at higher volumes in the future. Well, thanks 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.