Earnings Call Transcript - NUWE Q1 2021

Operator, Operator

Good day. Thank you for standing by, and welcome to the CHF Solutions, Inc. First Quarter 2021 Earnings Conference Call. I would now like to turn the conference over to Matt Basco from the Gilmartin Group. Please go ahead.

Matt Basco, Gilmartin Group

Thank you, operator. Thank you for joining today’s conference call to discuss Nuwellis’ corporate developments and financial results for the first quarter ending March 31, 2021. In addition to myself, with us today are Nestor Jaramillo, the company’s CEO; and Paul Wotta, the company’s Corporate Controller and Principal Accounting Officer. At 8:00 a.m. Eastern today, Nuwellis released financial results for the quarter ending March 31, 2021. If you have not received Nuwellis’ earnings release, please visit the Investors page on the company’s website. During the course of this conference call, the company will be making forward-looking statements, except for historical information mentioned during the conference call. Statements made by management of Nuwellis are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties based on management’s beliefs, assumptions, expectations, and information currently available to management. Those risks include, but are not limited to, risks associated with the possibility that the company may be unable to grow revenue in the future quarters. But the company may be unable to execute in its commercialization strategy, the possibility that it may not be able to raise the funds necessary for the company’s anticipated operations, that the company may not be able to commercialize its products successfully and the other risk factors described under the caption Risk Factors and elsewhere in the company’s filings with the Securities and Exchange Commission. By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments or otherwise. You should review the cautionary statements and discussion of risk factors included in the company’s press release issued today, the company’s latest 10-K, subsequent reports as well as other filings with the Securities and Exchange Commission.

Nestor Jaramillo, CEO

Thank you, Matt, and good morning, everyone. Welcome to the First Quarter 2021 Earnings Call and Corporate Update. Before we get into the details, I would like to take a moment to thank all the healthcare workers who continue to work hard, especially those who are administering the COVID-19 vaccine to help reduce the spread of the virus and allow society to return to normal. Also, I want to comment on our recent corporate name change. Over time, CHF Solutions has evolved to serve more than just the chronic heart failure community. We have learned that our gentle fluid management therapy not only effectively serves the chronic needs of heart failure patients but can address acute fluid overload in critical care patients and can provide lifesaving treatments for pediatric patients. As a provider of innovative technology, we have an obligation and duty to help improve outcomes for as many patients as possible. When we expanded the therapeutic focus areas we serve to include pediatric critical care and heart failure, we realized that our name was no longer a true representation of what we do. On April 27, CHF Solutions became Nuwellis with a tagline of restoring fluid balance, transforming care. The name signifies the new well for brighter today and better tomorrows for patients, families, and providers. As we look to the future, our evolution does not stop here. Our commitment to restore fluid balance in patients remains the same, but who we support has expanded. We have evolved, and this time our name shows that. Now turning to the business update. Although we were negatively impacted by persistent COVID-19 headwinds and extreme weather conditions in parts of the country, especially in the month of February, we ended the quarter strong. The company achieved solid performance in the first quarter of 2021, with 18% revenue growth over the prior year. On a sequential basis, we generated growth in our critical care and pediatric categories, while heart failure declined. First quarter of 2021 revenue mix was comprised of 50% critical care, 34% pediatric, and 16% heart failure. Our revenue mix has shifted significantly over the last 12 months, given our strategic expansion into pediatric and critical care opportunities. Specifically, critical care revenue increased materially due to the synergistic effect of treating non-COVID-19 critically ill patients in the ICU. We also generated solid revenue growth from our pediatric segment due to the clinical benefits that our therapy is offering the pediatric patient population and the increased utilization by recently trained centers and legacy pediatric accounts. While heart failure remains an integral part of the business, revenues declined in the first quarter due to the negative impact COVID-19 has had on heart failure patient behavior, overall procedure volumes and our limited access to hospitals. Now I would like to provide further details on each business segment, starting with our fast-growing critical care segment. During the first quarter, critical care once again outperformed all categories, driven by an increased utilization and unit placements of our Aquadex system in the ICU setting at many hospitals across the country. Specifically, utilization among strategic accounts was the highest we have seen in the last 5 quarters. Given the comfort level and familiarity that these accounts have developed over the course of the pandemic, we are seeing increasing levels of utilization among non-COVID-19 critically ill patients. As mentioned on previous calls, tailwinds from treating COVID-19 patients established a unique synergistic effect leading to increased Aquadex utilization to treat non-COVID-19 critically ill patients in the ICU. Due to the effectiveness of the Aquadex system in treating COVID-19 patients early in the pandemic, we believe an increased number of hospitals are wanting our device in their ICU to treat non-COVID-19 critically ill patients. With the likelihood of declining COVID-19 hospitalizations in 2021, we view this utilization trend to be favorable as the company continues to build awareness of the clinical benefits of the Aquadex system. Moving to our pediatric business. We once again experienced a strong utilization of the Aquadex therapy amongst our current installed base. We believe the increase in utilization is a direct reflection of two initiatives. First, the support that our enthusiastic key opinion leaders are providing in the training of doctors and nurses with the pediatric hospitals regarding the clinical benefits of Aquadex therapy in pediatric patients. Second, once the hospital staff is comfortable with the Aquadex system, we are seeing existing accounts purchase additional Aquadex units, given the high number of patients suitable for the Aquadex therapy. It is important to remember that the addition of new hospital accounts can be lumpy quarter-over-quarter. That said, we remain excited about the pediatric opportunity in front of us. Given the underlying momentum in our pediatric business, and the dedication and focus of our expanded sales team, our pipeline of pediatric accounts remains robust. As mentioned in the fourth quarter earnings call, we initiated a pediatric registry in January and enrolled our first station in April at Joe DiMaggio Hospital in Hollywood, Florida. The registry is designed to collect real-world evidence on the use of the Aquadex SmartFlow ultra filtration system in pediatric patients with fluid overload. The registry will include data on ultra filtration utility, performance, and safety profile in pediatric patients over 20 kilograms from approximately 10 research institutions over a 2.5-year period and anticipates collecting data on up to 500 patients. We are grateful to partner with organizations like Joe DiMaggio Children’s Hospital as part of our commitment to improve and customize pediatric care with the Aquadex SmartFlow system. As part of our continued growth, we are committed to finding ways to advance in future technology and progress our pipeline while demonstrating that this innovative and gentle therapy is safe, effective, and beneficial for pediatric patients who are suffering from fluid overload. We are excited that the registry will spread awareness within the pediatric community regarding the clinical efficacy of the Aquadex therapy and its increased utilization. Now turning to heart failure. While heart failure remains an integral part of our business, revenues declined compared to the prior year period. While our access to hospitals has been limited due to the pandemic, we expect this segment to recover in 2021, fueled by more normalized patient behavior and increased access to hospitals due to the decrease in the spread of the virus. Also, recent clinical evidence demonstrating the clinical benefits of the Aquadex therapy and the expected Category III code approval later this year. As mentioned last quarter, we successfully submitted our Category III CPT code application in November for the ultrafiltration therapy used in the Aquadex SmartFlow, which we expect will provide access to the outpatient market. We believe the outpatient market represents a sizable opportunity and addresses a significant problem for hospitals and heart failure patients that Nuwellis is uniquely positioned to solve. Especially, we believe early intervention in the outpatient setting via peripheral venous access will reduce overall hospitalizations, improve patient quality of life, and lessen the burden on the overall health care system. In conjunction with this submission, we received a strong endorsement for the application from two major medical societies. And in January, we received positive news from the regulatory body, allowing us to use the recent published data analysis titled, Ultrafiltration is better than Diuretics, demonstrating ultrafiltration superiority for the management of volume overload in acute decompensated heart failure patients as support for reimbursement submission. Given the current timeline of events, we expect to obtain the new Category III CPT code for reimbursement in the third quarter of 2021. Finally, I want to end by thanking our recent CFO, Claudia Napal Drayton, for her 6 years of service and leadership. She was instrumental in driving the financial strength of the company. She also helped me and the rest of the executive team in creating the company’s mission statement and guiding principles, which are the foundation for what we do. Equal importance was the role that Claudia played in the recent successful $20 million capital raise. I will now turn the call over to Paul Wotta, Nuwellis’ Corporate Controller and Principal Accounting Officer, who will walk you through our Q1 2021 results.

Paul Wotta, Corporate Controller

Thank you, Nestor, and good morning, everyone. Turning to our financial results. Revenue for the first quarter was $1.9 million, up 18% from Q1 of last year. Revenue performance for the quarter was driven by increased capital equipment sales and strong utilization of disposables among our critical care accounts. In the quarter, we also saw continued momentum in our established pediatric accounts. Regarding our cost of sales and operating costs, I will briefly comment on major drivers. First, regarding our cost of sales, our gross margins were 50.4% for the quarter compared to Q1 of 2020, which had margins of 51.2%. As mentioned in previous earnings calls, gross margins are heavily dependent on revenue mix between disposable circuits and capital equipment sales. Given our strong capital equipment placements, specifically within critical care, our gross margins were slightly down compared to the first quarter of 2020. Given the increased utilization we see in critical care, we believe the placement of Aquadex systems will lead to increased gross margins via favorable disposable product mix in the future. Next, regarding our SG&A expenses, Q1 2021 expenses were $5.2 million, an increase of 15.4% over Q1 of 2020. The increase in SG&A expense was primarily due to the timing of nonrecurring administrative expenses and our continued investment in sales and marketing activities. Our R&D expenses were $950,000 in Q1 of 2021, a 9.6% increase compared to Q1 of last year. The increase in R&D expenses over the prior year was primarily driven by clinical expenditures related to our pediatric registry. The net loss for the quarter was $5.2 million or $1.25 per share compared to a net loss in the first quarter of 2020 of $4.6 million or $11.54 per share based on the adjusted share count. Regarding our liquidity position, we used $5.4 million of cash in the quarter to finance our operations. To further strengthen our balance sheet, in March, we completed a $20.9 million capital raise with net proceeds of $18.9 million. We ended the quarter with cash and marketable securities of $27.9 million. Based upon our current operating plan, we believe that our existing cash and marketable securities will enable us to fund our operating expenses and capital expenditure requirements. In terms of modeling Q2 of 2021, we continue to closely monitor the situation caused by the COVID-19 pandemic. We expect to see increased utilization of our therapies in areas of the country where we have an established presence. However, if access to hospitals continues to be limited, it could potentially impact our traditional business. At this point, we expect Q2 revenues to increase mid- to high single digits sequentially. Regarding our gross margins, we expect Q2 margins to increase modestly relative to Q1 of 2021. We expect that on an annual basis, our margins will continue to benefit from increased disposable volumes. As hospital capital budgets continue to be constrained, we may experience temporary impacts to our margins. Regarding our operating expenses, we expect our SG&A spend to decrease sequentially in Q2 of 2021, given the nature of the nonrecurring expenses we have incurred in Q1. In R&D, we expect spending to increase slightly relative to the first quarter of 2021 as we continue to increase activities in our pediatric clinical studies and development projects. Operator, please open the call to questions.

Operator, Operator

And your first question is from Jeffrey Cohen of Ladenburg Thalmann.

Destiny Buch, Analyst

This is actually Destiny on for Jeff. Perhaps I’ll just start with a couple from these last few comments. When talking about SG&A, what percentage was nonrecurring this quarter? And then in terms of R&D beyond the registry, are there any other developmental efforts you’d like to call out?

Nestor Jaramillo, CEO

Well, Destiny, thank you for the questions. The majority of the SG&A expenses were due to our expanding sales organization and marketing. A percentage of that was due to a one-time expense related to our registration in Delaware. We also incurred nonrecurring expenses for the company’s rebranding initiative. We expect our SG&A next quarter to be lower than it was this quarter. Was there another part of your question, Destiny?

Destiny Buch, Analyst

Yes. Just the R&D increase, I know you have the registry going on. Are there any other development efforts that you could call out or is it strictly related to the registry?

Nestor Jaramillo, CEO

Well, in addition to the registry, we have talked about in previous quarters about our continuing improvement in our development and innovation. We continue to innovate our technology, both in the pediatric as well as in the adult offerings.

Destiny Buch, Analyst

Could you please remind us of the current size of the sales force? I understand it is divided between representatives and clinical specialists. Have there been any changes to either group since our last conversation?

Nestor Jaramillo, CEO

Yes. Last quarter, we had some areas without clinical specialists. This quarter, we have filled most of those areas with clinical specialists. As you recall, the clinical specialist plays a crucial role in our sales process.

Destiny Buch, Analyst

Got it. Okay. Would you also be able to discuss average units per center? And then remind us how many consumables are typically utilized per patient per day?

Nestor Jaramillo, CEO

Okay. I don’t know if we have disclosed that information in the past, Destiny, but there is a significant difference between the utilization per patient in the adult population versus the pediatric population. It’s probably around, I’m going to say, 1.2 to 1.5 circuits per adult patient treated with the Aquadex compared to about 4 or 5 circuits for a pediatric patient. And that’s due to the fact that pediatric patients tend to stay longer on the therapy than the adult patient population.

Destiny Buch, Analyst

I see. Okay. And then just sticking with the pediatric patients for a moment. I know you announced the first patient during the quarter. So I’m wondering if there’s any additional update here, maybe percentage of patients enrolled?

Nestor Jaramillo, CEO

Yes. We continue to have our accounts enrolled patients. We’re not providing at this time what the count but it’s being well received and the centers that are participating in the registry are really excited about gathering the information that is going to provide more information about the efficacy of the therapy.

Destiny Buch, Analyst

Okay. And then my last one, and I’ll jump back in queue. I think you touched on it briefly in the beginning of the call, but I’m just wondering if you could provide the initial feedback from your reps, your customers, your patients, etc., about the name change?

Nestor Jaramillo, CEO

Good question, Destiny. It’s been well received, not only because the name now represents more of what we are doing in the company but also the tagline is very important. We’re restoring fluid balance in patients suffering from fluid overload, and therefore, we’re transforming the care. The new data that we are receiving on the efficacy of the therapy is indicating that the therapy is working very well and that early use of the therapy would benefit patients as well as the healthcare system. So the customers and the sales organization are very excited about the new name. Any other question, Destiny?

Operator, Operator

Your next question is from Anthony Vendetti of Maxim Group.

Anthony Vendetti, Analyst

Nestor, I was just curious, you’ve talked about pediatric patients also weighing less than 20 kilograms as an opportunity. Obviously, the physicians could use it off-label. Can you talk about where the process is in trying to get FDA approval for pediatrics, pediatric patients less than 20 kilograms?

Nestor Jaramillo, CEO

Yes. We continue to work with the FDA on getting the approval. But Anthony, the Aquadex system as gentle and effective as it is to treat patients under 20 kilograms is an adult device. It was designed for the adult patient population. So we are working right now on looking at the development of a pediatric-dedicated device that is going to be much better suited for these patients under 20 kilograms. And that’s the device that we’re going to go back to the FDA and ask for labeling under the 20 kilograms.

Anthony Vendetti, Analyst

Okay. That’s interesting. Can you tell me a little bit about the timeline for that, the development of the device? Any kind of color you can give around the timing?

Nestor Jaramillo, CEO

Yes. I’m sure that you’re familiar with the development of MedTech devices. It’s not something that happens overnight. But we have a partner with an outside organization that is helping us design this device, and we plan to do it very quickly.

Anthony Vendetti, Analyst

Okay. Can you remind us how large the pediatric market is? Since pediatric patients typically use the device for a longer duration, it leads to more consumables, presenting an opportunity for Nuwellis. How many pediatric patients are affected by fluid overload each year?

Nestor Jaramillo, CEO

Right, right. Well, as best as we have been able to estimate the market, we believe that the market around $150 million is addressable. These are patients suffering from fluid overload that can be treated with the Aquadex system compared to adults. It is much smaller, but pediatric patients tend to stay and receive therapy sometimes for weeks, sometimes for months, and the utilization can be, as I mentioned before, anywhere from 4 to 5 circuits for pediatric patients on average. And sometimes we have seen 10, 11 circuits per patient.

Anthony Vendetti, Analyst

Okay. That’s helpful. And in terms of the placement of the Aquadex system, generally, it’s easier to sell back into hospitals that have already purchased one device. Can you talk about, particularly this quarter, how many new hospitals have placed your systems, new customers versus selling to existing customers?

Nestor Jaramillo, CEO

Anthony, we’re not providing specific numbers of hospitals that we opened per quarter, but we have seen an increase in utilization in our existing accounts, both in terms of purchasing circuits and consoles and also the new accounts tend to purchase more than one console just to keep it as a backup. Many of them buy 2 to 3 consoles to place a patient or two patients in therapy and keeping the other console as a backup.

Anthony Vendetti, Analyst

Okay. That’s helpful. So new customers generally buy 2 to 3. And the ability to access these new customers, obviously, COVID headwinds has impacted your company. But we’re hearing that hospitals, not all of them, but a lot of hospitals are starting to open back up to medical device salespeople. Can you talk about what you’re seeing? What your sales force is seeing in terms of the ability to access new hospitals?

Nestor Jaramillo, CEO

Yes. Yes. Yes. You’re right. The access to hospitals has started to open up, many of them by invitation only. And pediatric hospitals are a little different just because these patients, pediatric patients, there’s nothing else available in the market to treat them. So many of the pediatric hospitals that we have been able to open during this pandemic have asked us to come in. We’ve been very creative in terms of how we train their nursing staff, many of them through video and virtual means. But also training them outside of the hospital. So we’ve been able to access pediatric hospitals during this pandemic.

Anthony Vendetti, Analyst

Okay. Great. And then the last question is on the new code, the reimbursement code. I think you mentioned by Q3 ‘21, by the third quarter of this year. Can you talk a little bit about what that could mean for Nuwellis? And what kind of catalyst could that be in the near-term or over the next year or so?

Nestor Jaramillo, CEO

Yes, we are very excited about the approval process. We began this journey in November with our submission. In January, the CMS editorial panel recommended the approval of the CPT code, backed by strong support from two medical societies. The final approval from CMS is anticipated in the third quarter of this year. This approval would open up several opportunities for the company. First, it would facilitate access to outpatient clinics for treating patients with fluid overload, a service that isn't currently available. Treating patients in outpatient settings is expected to significantly improve their quality of life while also reducing costs for hospitals and the healthcare system. Second, on the inpatient side, physicians currently lack a CPT code to bill against. With the introduction of the Category III code, they will be able to bill for our therapy in inpatient settings. Finally, this Category III code will enable physicians to gather data on the costs associated with treating patients using the Aquadex, which will be crucial as we aim for a Category I code in the future. These are the three key benefits we foresee from the Category III code for Nuwellis.

Anthony Vendetti, Analyst

Okay. Yes. No, it seems like a significant milestone for the company, if you can get final approval by third quarter ‘21.

Operator, Operator

Your next question is from Brooks O’Neil of Lake Street Capital.

Brooks O’Neil, Analyst

I have a couple of follow-on questions. First, just carrying on from Anthony there on the CPT code, you mentioned the Category I code. What would be the timing, Nestor, to go from receiving or implementing the Category III code to getting to a Category I code?

Nestor Jaramillo, CEO

Thank you for your question, Brooks. It's not very predictable, as it depends on the information we gather during Category III. Once we have a clearer understanding of the costs associated with providing this therapy, the process for applying for Category I will become more predictable and straightforward.

Brooks O’Neil, Analyst

Okay. That makes sense. Second question, I really like the name change, but I’m curious what the reaction has been from your CHF customers? Obviously, a broadened focus makes a lot of sense, but you want to make sure you keep everybody who’s under the tent going forward. So has the response been positive from them?

Nestor Jaramillo, CEO

Yes, it has been very positive. Many customers, particularly pediatric physicians, critical care doctors, ICU staff, and cardiac surgeons have expressed that CHF Solutions no longer accurately reflects their usage of the Aquadex for patients who are not in heart failure. Physicians have indicated that it’s time for a name change, and investors feel similarly. When we discuss how we are expanding the use of Aquadex in critical care, cardiac surgery, sepsis, and pediatric patients, they realize that the name no longer encompasses everything we’re doing as a company. Overall, the response has been very well received.

Brooks O’Neil, Analyst

Good. That’s great. Third question. So obviously, as you mentioned, there’s been tremendous COVID headwinds that have made it difficult to access doctors and hospitals, etc. I’m sure that’s been a tremendous impediment. I have a recollection that you did see some benefit from COVID as well, some utilization of Aquadex to help COVID patients. And do you see that as now something that will go away? Or is that something that’s likely to remain a part of the effort going forward?

Nestor Jaramillo, CEO

Yes. A very good question, Brooks. And it’s a good observation. At the beginning of the pandemic, we saw a significant increase in utilization of the Aquadex to treat critically ill patients infected with COVID-19 that came into the ICU. So in those hospitals where we had this system in, we saw an increase in utilization. What has happened is that these hospitals and new hospitals that are starting to use the Aquadex to treat COVID-19 patients have seen how effective this therapy is, treating any type of critically ill patients that come to the ICU. So now we have seen the synergistic effect of treating COVID-19 patients to non-COVID-19 patients that are critically ill in the ICU.

Brooks O’Neil, Analyst

That’s fabulous. Okay. Just one more for me. You mentioned the outpatient market. It seems like a great opportunity, and we do quite a lot of work with companies that have important therapies that have been used inpatient and take them to the home. How big a market do you see that for Nuwellis? And can you just talk about how you are starting to think about accessing that market from a go-to-market standpoint?

Nestor Jaramillo, CEO

Right. Brooks, we have seen and we have discussed with a lot of hospitals the use of the Aquadex in the outpatient setting. Some of the data that has been published recently and that we have discussed in previous calls, indicates that there is a significant reduction of hospitalizations and readmissions when treating these patients. Many of these hospitals do want to treat heart failure patients outside of the hospital, in the outpatient setting. And the reason for that is that you can schedule the appointment, and the patients who come in receive the therapy. Because the therapy has been very effective in reducing the readmission, this will be a significant savings for hospitals if they can treat patients in the outpatient setting. Did I answer your question, Brooks?

Brooks O’Neil, Analyst

Well, I would love to get a sense for the size of the market, but I’m guessing that’s not data that’s readily available, but it seems to me to be a big opportunity. So we can talk about it more down the road.

Nestor Jaramillo, CEO

Right. Yes. Yes. We have not provided any number in terms of the size of the market. But the current heart failure inpatient business has an addressable market of $900 million is what we are estimating. So you can imagine that treating some of these patients in the outpatient setting will be a great opportunity for us as well.

Operator, Operator

We have no further questions at this time. I will turn the call back over to Nestor for any closing remarks.

Nestor Jaramillo, CEO

For my final remarks, I want to communicate that the company is in its best financial shape since 2017. We have sufficient cash on the balance sheet to provide a meaningful runway to fund operations while we execute our strategy. We have seen impressive growth rates during the last 6 quarters thanks to our expansion into pediatric and critical care. The recent clinical evidence in various therapeutic areas continues to support the ease of use, flexibility in application, and the predictable outcomes of the Aquadex system, which is transforming the lives of many patients and their families. I want to thank you for joining our first quarter 2021 conference call and wish you all a good day. Thank you.

Operator, Operator

Thank you, everyone. This does conclude today’s conference call. You may now disconnect.