Nuwellis, Inc. Q1 FY2023 Earnings Call

Good morning and welcome to the Nuwellis First Quarter 2023 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 that this event is being recorded. I would like now to turn the conference over to Ms. Vivian Cervantes, Investor Relations at Gilmartin Group. Please go ahead.

Thank you, operator. Thank you, everyone, for joining us for today's conference call to discuss Nuwellis' corporate development and financial results for the first quarter ended March 31st, 2023. In addition to myself, with us today are Nestor Jaramillo, Nuwellis' President and CEO; and Lynn Blake, CFO. We also have Dr. John Jefferies, Nuwellis' Chief Medical Officer, and John Kowalczyk, the Company's Senior Vice President of Sales & Marketing. At 8 o'clock Eastern today, Nuwellis released financial results for the quarter ended March 31st, 2023. If you have not received Nuwellis' earnings press release, please visit the Investors page on the company's website. During this call, the company will be making forward-looking statements. All forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward-looking statements are based upon current available information, and the company assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to the cautionary statements and discussion of risks in the company's filings with the SEC including the latest 10-K and subsequent reports. With that, I would now like to turn the call over to Nestor.

Thank you, Vivian, and good morning, everyone. Welcome to Nuwellis first quarter 2023 earnings conference call. On today's call, I will provide an overview of our first quarter performance and give an update on our strategic initiatives. Our Chief Financial Officer, Lynn Blake, will then provide detailed commentary on the financial results. Before I open the call up for questions, followed by my closing remarks. Dr. John Jefferies, our Chief Medical Officer, and John Kowalczyk, our Senior Vice President of Sales and Marketing, are also on today's call and will be available during the question-and-answer section. Turning to our first quarter results. In the first quarter of 2023, Nuwellis generated $1.8 million in revenue, a decrease of 5% over the first quarter of 2022. By segment, first quarter 2023 revenue in heart failure increased 21% over the same period last year, while pediatric and critical care revenue declined 28% and 4%, respectively. In heart failure, which in the last six months has had a significant boost from multiple peer-reviewed publications. The 21% revenue growth in Q1 follows strong year-over-year heart failure revenue growth of 47% in Q4 of 2022. We attribute the growth in heart failure to the steady flow of positive peer-reviewed publications and clinical evidence bolstering the activities of the sales and marketing organization, which is now fully staffed in all territories. We remain committed to driving market penetration for our ultrafiltration treatment earlier in the hospital admissions cycle and across multiple hospital specialty units. Key to execution is driving awareness among clinicians and providers to understand that ultrafiltration is the next logical step in the care pathway. In other words, patients for whom oral or intravenous diuretics are not effective should immediately transition to ultrafiltration therapy, which is a mechanical fluid removal solution and as such is more controllable, precise, and predictable. This is the message that our field organization is now delivering, and based on the heart failure segment results for the past two quarters, this messaging is having a positive effect. In pediatric care, we remain well positioned and excited about our opportunities, which include the expected IDE approval of our new pediatric dedicated continuous renal replacement therapy device in the first quarter of 2024. The softer-than-expected results in the first quarter were driven by lower patient census in key accounts due to fewer hospitalizations of babies born with kidney disease. Census-driven factors are not new to our business as we have seen this trend in the past, similar to the decline in the third quarter of 2021. While changes in hospital census are difficult to predict, we are confident that we have the right measures in place to execute on our pediatric growth strategy, including increasing the use of the Aquadex ultrafiltration system to treat other pediatric conditions such as heart failure and cardiothoracic surgery. Today, we have 30% more pediatric centers using Aquadex than in the same quarter last year. Overall, our Q1 revenue does not reflect the positive activities that excite us about the future of Nuwellis, which include developments in a number of hospitals to use Aquadex not only for treating heart failure and critical care patients but expanding its use to other hospital specialty units, including liver disease and left ventricular assist device patients. Additionally, we are making steady product development progress on our pediatric device aimed at saving lives and increasing the quality of life for neonates and small children with kidney disease. We believe this device will be a game changer in pediatric kidney treatment. Now I would like to provide updates on our top strategic initiatives aimed at making Aquadex the standard of care for fluid overload patients resistant to diuretics. In the first quarter, we were pleased to announce a peer-reviewed publication advocating the use of ultrafiltration for heart failure patients resistant to diuretics. The publication titled 'Extracorporeal Ultrafiltration for Acute Heart Failure' was featured in the Cardiorenal Medicine Journal and authored by Dr. Amir Kazory and contributing nephrologist physicians. The publication reviews pooled data from seven randomized controlled trials of ultrafiltration, with a total of 771 patient participants. First, the authors outlined the scale of the clinical burden of heart failure. Approximately 6.5 million adults in the United States have heart failure, and one in eight deaths has heart failure as a contributing cause of mortality. Nearly 40% to 45% of patients who develop heart failure die within five years of diagnosis. Heart failure has the highest re-hospitalization rate among all medical conditions, with 24% of patients readmitted within 30 days and 50% of patients readmitted within six months. The annual cost of care for patients with heart failure is estimated at $60 billion in the US, with hospital-related expenses accounting for almost 70% of the total costs. The authors then highlighted the clinical application and value of ultrafiltration. The most important findings included predictable, adjustable, and more efficient fluid removal with ultrafiltration compared to diuretics without clinically adverse impacts on renal function, leading to a reduction in hospital readmissions and related healthcare expenses. Applicability of ultrafiltration therapy in other clinical settings such as cardiac surgery, burn units, and other specialty units where active and prompt fluid volume management is critical—expanding into outpatient centers and other ambulatory settings to treat patients before their symptoms become severe and necessitate hospital admissions. We have been and plan to continue using this peer-reviewed study to expand our efforts and grow the heart failure segment of our business. We are also continuing to make progress on our reverse heart failure trial with 11 sites activated and a two-fold increase in the number of enrolled patients since last quarter. As a reminder, the primary effectiveness endpoint of the reverse heart failure trial will evaluate mortality and heart failure events within 90 days as a comparison between Aquadex ultrafiltration therapy and intravenous loop diuretics. We look forward to updating you on additional clinical data supporting the use of ultrafiltration with Aquadex as a mechanical fluid removal therapy to treat new indications including liver disease and left ventricular device assist implantation. Turning to our product development initiatives, we remain on track with the development of our pediatric continuous renal replacement therapy device, and we continue to anticipate IDE approval in the first quarter of 2024. We, along with physicians, namely pediatric nephrologists, are extremely excited about this product as it addresses the unmet needs of the pediatric patient population and could significantly increase the quality of life for neonates and small children suffering from life-threatening fluid overload. As I mentioned earlier, we believe the device will be a game changer in pediatric treatment. In conclusion, our team remains focused on leveraging our clinical data to steadily build awareness and drive market penetration of our Aquadex ultrafiltration system to treat fluid overload patients resistant to diuretics. We are addressing a $2 billion plus market with opportunities across multiple inpatient specialty units and outpatient service centers. Our team is engaged in executing our growth agenda as we continue to improve the lives of patients and support caregivers and clinicians who face the limitations of diuretics, which is the current standard of care for fluid overload patients resistant to diuretics. We are confident that a mechanical fluid removal alternative using the Aquadex ultrafiltration system is the solution. Now, I would like to turn the call over to our Chief Financial Officer, Lynn Blake, to discuss our Q1 financial results.

Thank you, Nestor, and good morning, everyone. Revenue for the first quarter of 2023 was $1.8 million, a 5% decline year-over-year. By segment, first quarter 2023 revenue in heart failure increased approximately 21% over the same period last year, while pediatrics and critical care declined approximately 28% and 4%, respectively. In pediatrics, as Nestor mentioned, the decline was driven primarily by lower patient census, with lower than expected neonate hospital admissions. Gross margin was 58.4% of sales for the fourth quarter, an increase of 120 basis points compared to the gross margin of 57.2% in the prior year quarter, driven by an increase in circuit ASPs and, to a lesser extent, favorable product and geographic sales mix. Selling, general and administrative expenses were $5.5 million in the first quarter of 2023, compared to the first quarter last year, SG&A expenses increased by approximately $1.1 million or 24%. This increase reflects both increased staffing expenses and seasonally higher year-end-related public company expenses, which were elevated this year due to additional year-end audit and legal work associated with our October 2022 financing and related stockholder meetings. Additionally, we incurred incremental professional fees associated with consulting related to our strategic initiatives in the quarter. First quarter research and development expense was $1.4 million, an increase of approximately $300,000 or 29% compared to the first quarter last year. On a sequential quarter basis, R&D costs increased $227,000 or 19%. These increases were driven by increased product development expenses associated with the ongoing development of our pediatric dedicated device. Total operating expenses were $6.9 million in the quarter, an increase of approximately $1.4 million compared to $5.5 million last year. Given the factors discussed, the net loss in the first quarter was $6.5 million or a loss of $5.76 per basic and diluted common share compared to a net loss of $4.5 million or $42.45 per basic and diluted common share for the same period in 2022, that loss adjusted for our December 2022 reverse stock split. The current quarter's net loss includes a non-recurring non-cash expense of approximately $750,000 associated with the revaluation of the warrants issued in conjunction with our October financing. Debts expense was recorded in other expenses on the income statement. From a liquidity perspective, we ended the first quarter with $12.1 million in cash, cash equivalents, and marketable securities, and no debt on the balance sheet. We had approximately 1.2 million common shares outstanding at the end of the quarter. This concludes our prepared remarks. Operator, we'd like to open the call to questions now, please.

Thank you. We'll now begin the question-and-answer session. The first question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

So a few questions from my end. I guess, firstly, could you talk about pediatrics that came in light and mention that it sounded like the census was lower for candidates for your therapy. Talk about that. And also could you give us a frame of reference as far as the percentage of revenue for the quarter that pediatrics represented?

Okay. Good morning, Jeff. Thank you for your question. The pediatrics shortfall was mainly in our large legacy accounts. In these accounts, we have experienced much lower census than we expected, meaning those patients that qualify for our therapy, such as neonates needing critical care. As you remember, most of these patients treated with the Aquadex ultrafiltration system are off-label. Our indication is for patients weighing 20 kilograms and above. We're still increasing our focus on pediatrics and other indications such as cardiac surgery and heart failure to compensate for the lower census we are seeing right now. Lynn, do you want to provide the answer on the percentage of the revenue that was attributed?

Sure. Hi, Jeff. The Q1 revenue was 23% from pediatrics. 23% of the total for the quarter.

Got it. While we're discussing pediatrics, you mentioned that you're expecting an IDE approval in the first quarter of 2024. Is that correct?

That's correct, Jeff.

Okay. And then could you discuss the reverse heart failure trial a little bit? 11 centers, what percent enrollment are you at? I think I heard a number, but what is the total enrollment number that you're trying to achieve, and what percent are you currently at, and when might that conclude?

Right. Jeff, the total number that we anticipate to have is around 372 patients. However, we are redoing our statistical analysis; that may favor a lower sample size, but we're not completely done with all the statistical analysis that needs to be done. We are about a little over 10%, 15% of total enrollment. But we anticipate finishing enrolling patients in 2024. That's our target discussed with all our principal investigators, and we believe that is achievable.

Got it. Okay. Then I'm going to jump over to heart failure. Now that you're fully staffed in your territories, what would you anticipate the impact on the top line for the balance of this year?

We will continue to see double-digit growth in heart failure and will continue to execute on all the clinical data we have obtained to drive awareness among clinicians.

Okay. Got it. And you talked about some other areas such as liver and LVAD. Could you discuss what segments of the hospital and what typical populations you are seeing some utilization in?

Yes, good question, Jeff. Recently, during my visit, we visited an account that has been good for us. I have used it for a number of years, and they mentioned to us that they have quite a few LVAD patients treated with Aquadex immediately after transplant and during follow-ups. Regarding the liver, we have an important center in New York City that has been using it for liver patients. They have submitted a publication that we are waiting to be published in a journal. The delivery is usually in the liver department of the hospital.

Got it. Okay. I think that does it for us. Thanks for taking the questions.

Thank you, Jeff.

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

Thanks. Maybe just a follow-up on the reverse heart failure trial. Did you say all the sites are activated at this point?

No, Anthony. We have a target of 20 sites to be participating. We have now 11 activated, and the rest are in the process of being activated, getting approvals for the IRBs, contracts, etc.

Okay. Thanks for clarifying that. And then just in terms of having more salespeople, can you talk about the messaging for Aquadex? Clearly, as you stated, it's a huge market opportunity. Do you feel that the message is on point? What is the goal in terms of convincing other sites that Aquadex is something they should have multiple units of depending on the size of the hospital to treat fluid overload?

Yes, Anthony, that's a very good question. I'm going to let John Kowalczyk, our Senior VP of Sales and Marketing, answer that question. But before I turn it over to him, fluid overload is everywhere in the hospital. It is in the ICU, in burn units, heart failure, and emergency rooms. Our target is to create awareness among physicians. Soon you will hear more about the marketing strategies that we are implementing to raise patient awareness. But let me turn it over to John for him to tell you about the messaging we are conveying to our sales organization for delivery to our customers. John?

Yeah. Thank you, Nestor. Good morning, Anthony. The message is really this: As Nestor indicated, fluid overload is everywhere and supported by the data. In fact, 40% of patients admitted to the hospital will experience some degree of diuretic resistance or suboptimal results. Our messaging, based on published data, is to identify these patients earlier by using clinical study data, including Kazory and other published documents to include Dr. Haas' Abington tenure real-world experience. We're educating physicians to say to use a mechanical fluid removal system, Aquadex, earlier. By doing so, the message is supported by clinical data that indicates we may alleviate or minimize downstream consequences that occur with multiple medications leading to AKI, which may result in more aggressive forms of treatment such as CRT or dialysis. This process extends patient length of stay, which affects the hospital's costs. These are our messages, backed by the published data, and physicians are responding well.

Okay, great. So this is data presented to them. When engaging in the sales process, is it one of the key executives at the hospital? Is it physicians? Is it a combination? How does that work? And lastly, regarding conferences, are there specific upcoming conferences that you'll attend to widely disseminate the message?

Good question, Anthony. Let me turn it over to Dr. John Jefferies, who joined the company as our Chief Medical Officer and is a practicing clinician that has used our therapy. I believe he would be the best person to answer how the process works within hospitals concerning usage determination.

Sure. Thank you. Thanks for the question. I think every hospital is unique, but typically, to disseminate messaging effectively, it requires a dyad approach. You need to communicate with both the clinicians and the administration side. Part of the clinician discussion is about presenting data to substantiate the use of our technology. This ties into reverse HF, which is intended to provide contemporary data. However, on the administrative side, just because a physician wants the technology doesn’t mean it will be enacted. It must go through budget approval and multiple committees. My goal, and collectively, is to ensure that we message the value proposition to both the hospital administration and clinicians with data supporting the use of the technology, which is substantial. I believe this approach will build momentum, supported by the data. You heard from Nestor about the different phenotypes we can apply the technology to, which will increase the number of touchpoints within any given hospital—not just cardiologists but also hepatologists, liver transplant surgeons, cardiothoracic surgeons, intensivists, pediatricians, and pediatric nephrologists. These opportunities are only going to grow.

Thank you, John.

Thank you.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Nestor Jaramillo for any closing remarks. Please go ahead.

Yes. As we conclude this call, I hope that we were able to convey our optimism and our execution on our growth strategy from heart failure, other indications such as liver, LVAD, and our pediatric dedicated device as well as our unique therapy device and our heart failure clinical trial. With that, I would like to thank all our stakeholders, employees, shareholders, physicians, clinicians, and all medical healthcare staff. Thank you very much for your support. Without your help, we would not be able to transform the lives of patients suffering from fluid overload. So with that, thank you very much for your participation.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.