Earnings Call Transcript - NUWE Q3 2023

Operator, Operator

Good day, and welcome to the Nuwellis third-quarter 2023 earnings conference call. I would now like to turn the conference over to Vivian Cervantes, Investor Relations with Gilmartin Group, please go ahead.

Vivian Cervantes, Investor Relations

Thank you, Danielle, and thank you, everyone, for joining us in today's conference call to discuss Nuwellis's corporate developments and financial results for the third quarter ended September 30, 2023. In addition to myself, with us today are Nestor Jaramillo, Nuwellis's President and CEO; and Rob Scott, CFO. We also have Dr. John Jefferies, Nuwellis's Chief Medical Officer joining us today. At 8 AM, Eastern today, Nuwellis released financial results for the quarter ended September 30, 2023. If you have not received Nuwellis's earnings release, please visit the Investors page of the company's website. During this conference 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 currently 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 risk 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.

Nestor Jaramillo, President and CEO

Thank you, Vivian, and good morning, everyone. Welcome to Nuwellis's third-quarter 2023 earnings conference call. For our call today, I will provide an overview of our third-quarter performance and give an update on our strategic initiatives, including our supply and collaboration agreement with DaVita and our exclusive license and distribution agreement with SeaStar for its selective cytopheretic device or SCD, which recently received an FDA approvable letter for use in pediatric acute kidney injury under a proposed humanitarian device exemption. Dr. John Jefferies, our Chief Medical Officer, will also add additional context on our DaVita collaboration and our clinical programs, and provide his perspective on recent news affecting the renal industry. Our Chief Financial Officer, Rob Scott, will then provide detailed commentary on the financial results before opening the call up for questions followed by my closing remarks. Before I turn to third-quarter results, I would like to acknowledge concerns about the current market situation and its effect on companies like Nuwellis. The reason I feel confident in the future of Nuwellis is because we have three fundamentally sound short-term growth drivers. First, we have our organic business, which is growing, represented by five consecutive quarters of year-over-year growth in our core heart failure business. Second is the expected commercialization of three new products within the next two years. And third is our supply and collaboration agreement with DaVita. Turning first to our organic growth and third-quarter results. In the third quarter of 2023, Nuwellis generated $2.4 million in revenue, a 17% increase versus the third quarter of 2022 and a 16% increase over the prior quarter. What is most relevant in our view is therapy utilization or the number of circuits utilized with our console, which increased 26% over the same period last year, reflecting continued increase in the number of patients being treated with the Aquadex therapy. Last quarter in Q2, the utilization was 14%. By customer category, we are pleased to see firm growth across each of the three category targets. With third-quarter 2023 revenue in heart failure posting a 27% increase over the same period last year. Critical Care, a 16% increase and pediatrics, a 9% increase. Higher console sales led the heart failure growth, while utilization gains drove critical care and pediatric performance. We continue to attribute strong organic growth, especially in heart failure, to the growing awareness of our clinical data and support from multiple peer-reviewed publications over the past 18 months, validating the clinical and economic benefits of the Aquadex therapy. We are focused on driving awareness among clinicians and providers to help them understand that ultrafiltration through the use of the Aquadex system is the logical step when diuretics are not working and should be implemented earlier in the care pathway. Patients for whom oral or intravenous diuretics are not effective should immediately move to the mechanical fluid ultrafiltration therapy, which is more controllable, precise, and predictable. This is the message that our field organization is consistently delivering and is having positive results. I would like to point out that our installed base measured by placed Aquadex consoles is key for Nuwellis because it generates revenue quickly and is a leading indicator for growth in utilization of the therapy. The more consoles we place, the more patients are treated. With that, although our installed base in Q3 grew, we also continue to see fluctuations in hospital capital spending trends. Hospitals across multiple geographies are still facing capital budget constraints. As we navigate this environment, we are pleased to offer both rental programs and console sales, all while driving increased utilization in our systems. For example, in the first half of this year, our sales of consoles were soft, but our rental revenue increased by 36%. However, in Q3, our sales of consoles grew sequentially, but our rental revenue was soft. The good news is that hospitals are getting around the capital budget constraints by renting consoles while still growing the number of patients treated with the Aquadex therapy. We will continue to monitor hospital capital spending, especially in light of an elevated interest rate environment. Our second growth driver is our expected new product introductions within the next two years. We are excited that SeaStar Medical recently received the FDA approvable letter for its selective cytopheretic device or SCD, where we have exclusive US distribution rights for use in pediatric acute kidney injury patients. We are even more excited about the pooled analysis from two non-controlled clinical studies, showing that pediatric patients over 10 kilograms with acute kidney injury requiring continuous kidney replacement therapy treated with SeaStar's SCD had a 77% reduction in mortality and zero dialysis dependency at day 60 and zero device-related serious adverse events or infections. Turning to our internal product development program, also earmarked for our high-growth pediatric patient category. We continue to advance development of our pediatric continuous kidney replacement therapy device, which is complementary to the SeaStar SCD therapy. We, along with many pediatric nephrologists, believe this product will have a profoundly positive impact on survival and significantly improve the quality of life of neonates and small children with kidney malfunction, kidney issues, or those born without kidneys. We are executing to plan, and continue to expect IDE approval in the first half of 2024, with full FDA clearance and commercial launch in the US early in 2025. Finally, we continue to move forward with our supply and collaboration agreement with DaVita to pilot Aquadex ultrafiltration to treat adult patients with congestive heart failure and related conditions in selected US markets. In pairing the Aquadex system with DaVita's care team, we aim to expand ultrafiltration therapy to many heart failure patients in the US suffering from fluid overload and unresponsive to diuretics. We are actively engaged in finalizing treatment pathways and pilot study sites. At the conclusion of the pilot, DaVita has the option to deliver its ultrafiltration service approval and expand ultrafiltration services to inpatient emergency room, observation units, and outpatient facilities in their contracted hospital accounts. Once that approval is delivered, our supply and collaboration agreement would be effective for up to two five-year terms. We believe the future success of our pilot program with DaVita could potentially accelerate the clinical adoption of ultrafiltration when first-line medical treatments are ineffective, changing the revenue growth trajectory for Nuwellis with an accelerated path to profitability.

John Jefferies, Chief Medical Officer

Thank you, Nestor, and good morning, everyone. I'd like to cover three topics with you today. First, our collaboration with DaVita, as you heard alluded to. Second, the progress we are making with our reverse clinical trial. And then third, our thoughts on ongoing announcements regarding the impact of a certain class of weight loss drugs or the so-called GLP-1 agonists in renal care and our business. So for us, it's encouraging to note that our collaboration with DaVita continues to leverage expertise from cardiovascular medicine and nephrology, which provides a powerful vehicle to enhance our understanding of the cardio-renal syndrome. As such, we look forward to increased awareness of the growing number of heart failure patients in the United States and improved recognition of ultrafiltration as a safe and effective therapeutic option. Whereas treatment of fluid overload continues to center on the use of oral and intravenous diuretics therapies, Aquadex offers a more predictable and precise approach to the treatment of this very difficult clinical condition. Building on our body of clinical evidence, we continue to make progress on our Reverse-HF trial, evaluating mortality and heart failure events within 30 and 90 days of hospital discharge. To date, we now have 15 sites activated and a sevenfold increase in the number of enrolled patients since Q4 2022. As it relates to weight loss drugs, GLP-1 receptor agonists are increasingly prescribed in the US and internationally. These drugs are known to help regulate blood sugar levels. There are reports that GLP-1 receptor agonists may also reduce the risk of heart failure and other cardiovascular events in patients with type 2 diabetes. There's also evidence that these drugs may improve symptoms of heart failure. However, these reports are relatively small and long-term benefits in these areas are yet to be determined. And therefore, it is currently unclear how the GLP-1 receptor agonists will impact the use of ultrafiltration. Given the increasing number of heart failure patients around the globe, there will likely still be a strong need for fluid removal in these patients, some of whom will benefit from mechanical diuresis as opposed to drug-based interventions. In addition, this class of drugs may have the potential to bend the curve across multiple phenotypes, which means that there may be different rates of progression to advanced heart failure and other diseases such as end-stage renal disease. It may mean that more people will ultimately benefit from additional therapeutic options, such as Aquadex. For example, instead of going to a mechanical device, such as a left ventricular assist device or a heart transplant, patients may continue to be treated with guideline-directed medical therapy and experience heart failure exacerbations. Which presents an opportunity for us to deliver ultrafiltration therapy to improve volume status in these acute and chronic settings. Thank you, and I'll turn it back over to Nestor.

Nestor Jaramillo, President and CEO

Thank you, Dr. Jefferies. With that, let me now turn the call over to Rob to discuss our Q3 financial results. Rob?

Rob Scott, CFO

Thank you, Nestor, and good morning, everyone. Revenue for the third quarter of 2023 was $2.4 million, representing a 16% increase for the second quarter of this year and a 17% increase versus the third quarter of 2022. By customer category, third quarter 2023 revenue in heart failure increased approximately 27% over the same period last year, with critical care and pediatrics increasing 16% and 9%, respectively. We are pleased to highlight that despite hospital capital budget constraints, console sales increases led heart failure category growth by increases in utilization of the Aquadex systems for critical care and pediatric performance. Gross margin was 57.3% for the third quarter of 2023, compared to 61% in the prior year period. The decline in gross margin was primarily driven by lower console manufacturing volumes. However, our US disposable product margins are 74%, which are in line with medical technology industry standards. Selling, general and administrative expenses in the third quarter were $3.4 million, a decrease of approximately $800,000 compared to the prior year quarter, driven by reduced headcount and related compensation expense. Third quarter research and development expense was $1.1 million, an increase of approximately $200,000 compared to the third quarter of 2022, reflecting a modest increase in spend related to the final phases of development of our new pediatric CRRT device as we approach IDE submission. Total operating expenses were $4.5 million in the quarter, a decrease of approximately 12% compared to the third quarter of 2022 and a decrease of 26% sequentially. Both the year-over-year and sequential decreases were due to cost-saving measures implemented early in Q3. Net loss in the third quarter was $3.4 million, or a loss of $1.81 per common share, compared to a net loss of $3.9 million, or $36.72 per common share in the prior year period. The year-over-year decrease in the net loss per share is driven by an increase in sales, lower spend, and an increase in weighted average share count. We ended the third quarter with no debt and $4.9 million in cash and cash equivalents on the balance sheet, and we had 1.9 million common shares outstanding at September 30. On October 17, we closed $2.25 million of gross proceeds before deducting underwriting discounts and commissions in a public offering of Series J Convertible Redeemable Preferred Stock and Warrants. This concludes our prepared remarks. Operator, we would now like to open the call to questions.

Operator, Operator

The first question comes from Aaron Wukmir from Lake Street Capital.

Aaron Wukmir, Analyst

Hey, good morning, guys, this is Aaron on the line for Brooks this morning. I guess I want to start with sort of your expectation regarding the partnership with DaVita as it relates to what you see them contributing to your success and the financial arrangement you have with them. And I know you mentioned a little bit in the prepared remarks, but I'm just trying to get a bit more color on what we can sort of expect with that aspect going forward here.

Nestor Jaramillo, President and CEO

Yes, good morning, Aaron. That's a great question. As you may know, DaVita offers both ambulatory and inpatient dialysis services for patients who require dialysis while hospitalized. They have a team of nurses and medical staff dedicated to providing this service in what they call DaVita multi-treatment rooms. The goal is to allow patients who need ultrafiltration and have contracts with DaVita to receive these treatments in their own rooms. When you look at their public documents, you'll notice they have a significant number of contracted hospitals providing dialysis services. Therefore, the aim of our collaboration and supply relationship is for us to sell our product to DaVita, who will then offer services to hospitals to perform ultrafiltration for patients dealing with fluid overload. Did I answer your question, Aaron?

Aaron Wukmir, Analyst

Yeah, yeah. And then I guess sort of the same question in reference with SeaStar. How does that differ materially, I guess?

Nestor Jaramillo, President and CEO

We have an exclusive license and distribution agreement for their device designed for pediatric use. Pediatric patients who experience an inflammatory reaction and need hospitalization can be treated with the SeaStar device, which greatly enhances their survival rate and overall quality of life. Our plan is for our field organization to distribute this product to pediatric hospitals, particularly those where we already have a presence in ultrafiltration business.

Aaron Wukmir, Analyst

Got you. Okay, and then if I could ask just one quick follow-up. Obviously, there is a fairly significant reduction to operating expenses this quarter. You sort of mentioned that they were due to some cost-saving measures. Is this sort of the plan moving forward to continue to make these cuts to OpEx? Or do you sort of see a different path to achieving your longer-term goals? Thanks for taking the questions.

Nestor Jaramillo, President and CEO

Yes. On the last question, we implemented some savings measures in Q3 because we needed to rightsize and provide more runway to our cash. So we don't expect to do anything drastic in the future. But we will continue to find ways to be more effective and efficient both in the field as well as here in our headquarters with our product margins.

Aaron Wukmir, Analyst

Got you. That's very helpful. Thank you, guys.

Nestor Jaramillo, President and CEO

Thank you, Aaron.

Operator, Operator

The next question comes from Anthony Vendetti from Maxim Group.

Anthony Vendetti, Analyst

Thanks. Good morning, guys. I'm just a little bit more of a follow-up on DaVita. So, I know it's a pilot phase, but can you talk a little bit about what the plan is for the rollout, how many centers. And during this pilot phase, do you expect there to be a contribution to sales either in this quarter at all? Or is it more of a 2024 situation?

Nestor Jaramillo, President and CEO

Yes. yeah, good question, Anthony. Just to be clear, this collaboration with DaVita is new to every stakeholder in this treatment. I mean, it's new to DaVita, it’s new to us, and it’s new to the hospitals. So we decided to do a pilot just to learn everything that we need to learn about this collaboration, which includes treatment pathways for patients, billing, and a contract amendment that DaVita would have to do with their hospital customers. So we wanted to take the time to make sure that everything goes well, both for the hospitals as well as for DaVita and for us. So that's why we're initiating this pilot. We are in the process of defining the care pathway and identifying sites that are most suitable for this collaboration. We’ve been receiving a lot of positive feedback from hospitals contracted by DaVita, who want to implement ultrafiltration services due to capital budget or nursing staff constraints. So they feel that the collaboration with Nuwellis and DaVita will fit their needs appropriately. Regarding the impact in Q2, well, the idea is that DaVita would buy the consoles and the circuits as we start treating patients in the hospitals.

Anthony Vendetti, Analyst

Okay, so they'll start actually purchasing them. You mentioned a contract amendment, Nestor. Does DaVita have a certain contract with their customers, and the amendment to add in ultrafiltration, is that just a small amendment that they add in? What would that look like? Do they have to agree to purchase? Could they rent? Is there a lot of flexibility there? Or are you attempting to standardize it with DaVita and their customers?

Nestor Jaramillo, President and CEO

Yeah. Good question, Anthony. The answer to those questions is what we plan to clarify with this pilot. Right now, DaVita has contracted hospitals to perform dialysis, so they would have to amend those contracts to include ultrafiltration. DaVita will buy the product from us, and they will provide the services to their patients using their own clinical staff. What we assume is, and what we are all assuming, is that the hospital would pay a per patient fee to DaVita for treating those patients for ultrafiltration. But DaVita will take care of the rest.

Anthony Vendetti, Analyst

Okay, great. That's very helpful.

Nestor Jaramillo, President and CEO

Yeah, and that's the benefit for the hospital. Hospitals facing capital budget or nursing staff constraints find this a viable option for treating patients requiring ultrafiltration.

Anthony Vendetti, Analyst

And then a follow-up on the difference between that and maybe SeaStar's SCD device for pediatrics. So is that a similar situation where you purchase from SeaStar, and then you sell that device either with your ultrafiltration device or separately, depending on what the customer's looking for?

Nestor Jaramillo, President and CEO

Correct. We would purchase the product from SeaStar and then sell it to the customers with our ultrafiltration services. But let me clarify something here too. Our new pediatric dedicated device would be a CRRT device. That's the device that will be paired with the SeaStar device. Right now, when we start selling the SeaStar device, that would be used in conjunction with the CRRT devices that the hospitals currently have.

Anthony Vendetti, Analyst

I see. So your new continuous replacement therapy device is what you'll pair with the SCD device. But right now, until that device is available, the hospitals are using whatever device they have for CRRT.

Nestor Jaramillo, President and CEO

Correct. Right now, in the market there are only adult CRRT devices being used for these pediatric patients. So the SeaStar device will be used with any CRRT device currently used to treat this patient, but they are all adult devices. When we introduce our pediatric dedicated CRRT device together with the SeaStar device, it will represent a much better therapy for these patients. This is why we believe, as well as many pediatric nephrologists, that this is going to be a game changer.

Anthony Vendetti, Analyst

Game changer, yeah. Sounds like a good partnership.

Nestor Jaramillo, President and CEO

Correct.

Anthony Vendetti, Analyst

I just wanted to ask if you mentioned two to three new products, with this being one of them. Are there any others you can discuss at this time?

Nestor Jaramillo, President and CEO

Yes. Good observation, Anthony. We have three new products that we will be introducing in the next two years. Starting with the SeaStar device, that's one. We also plan to introduce very soon an additional venous catheter to be used with our Aquadex system. And then mid-2025, we plan to commercialize the pediatric dedicated CRRT device. So those are the three devices in the next two years.

Anthony Vendetti, Analyst

Great. Okay, thank you very much. Appreciate it. I'll hop back in queue.

Nestor Jaramillo, President and CEO

Thank you.

Operator, Operator

Seeing that there are no further questions, I would like to turn the conference back over to Nestor Jaramillo for closing remarks.

Nestor Jaramillo, President and CEO

Thank you, operator. We are deeply encouraged by our progress across multiple initiatives, including organic growth in our core business. We believe the success of our DaVita pilot program will lead to ultrafiltration service approval, expanding ultrafiltration therapy, and meaningfully accelerate our revenue growth and path to profitability. To this, we add new product opportunities in our high-growth pediatric category with the SeaStar SCD device targeted for marketing approval for commercialization by year-end 2023 or early 2024, depending on the approval. Finally, with increased awareness of our body of clinical and economic evidence, we continue to advance market penetration in our ultrafiltration therapy with healthy growth in therapy utilization in our heart failure, critical care, and pediatric categories. As we conclude our call, I would like to thank all our stakeholders as well as employees, stockholders, physicians, nurses, patients, and healthcare workers in the field. We have a full and exciting lineup of opportunities ahead and appreciate your continued support as we drive meaningful progress in our initiatives to transform the lives of patients suffering from fluid overload with our Aquadex system ultrafiltration therapy. Thank you.

Operator, Operator

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