Earnings Call Transcript - NUWE Q2 2021

Operator, Operator

Good day, and thank you for joining us. Welcome to the Nuwellis Inc. Second Quarter 2021 Earnings Conference Call. I will now turn the call over to your speaker today, Matt Bacso from Gilmartin Group. Thank you, operator, and thank you for joining today's conference call to discuss Nuwellis' corporate developments and financial results for the second quarter ended June 30, 2021. In addition to myself, with us today are Nestor Jaramillo, the company's CEO; and George Montague, the company's CFO. At 8:00 a.m. Eastern today, Nuwellis released financial results for the quarter ended June 30, 2021. If you have not received Nuwellis' earnings release, please visit the Investors page on the company's website. During this conference call, the company will be making forward-looking statements, except for historical information mentioned during the conference call, statements made by the management team of Nuwellis are forward-looking statements that are 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 that are 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 future quarters, that the company may not be able to commercialize its products successfully, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations 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 because 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 under the titles Risk Factors or Cautionary Statements related to forward-looking statements for additional discussions of risk factors that could cause actual results to differ materially from management's current expectations. Those discussions regarding risk factors as well as the discussions of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company's website. With that, I would like to turn the call over to Nestor Jaramillo, Nuwellis' CEO.

Nestor Jaramillo, CEO

Okay. I'm going to start. And first and foremost, thank you very much for connecting to the Nuwellis' second quarter 2021 earnings call. I apologize for the technical difficulties that we just experienced. Before providing our corporate update, I would like to review three important events that are making our company very different than what we were a quarter ago. First, I would like to officially welcome George Montague, our new CFO, who is joining us on today's call. George brings more than two decades of health care, finance, and leadership experience. Most recently, he served as the Chief Financial Officer and Chief Operating Officer of Smiths Medical, a $1.2 billion device manufacturer, where he was instrumental in restoring growth and improving profitability. He also led finance and strategy for two of Medtronic's four operating groups, including the Restorative Therapies Group. Similarly, another seasoned healthcare industry executive, Neil Ayotte, recently joined Nuwellis as our Senior Vice President, General Counsel, Secretary, and Chief Compliance Officer. Both are here with me on this call, and you will hear from George in a few minutes. We are already benefiting from the experience and expertise that George and Neil bring to the team. The second event relates to our rebranding. We are thrilled by the early positive reception from the health care community of our new corporate name, Nuwellis. Both hospitals and physicians alike have shared positive feedback, recognizing us as a company that is no longer solely focused on serving the chronic heart failure community, but one that is truly transforming care through restorative fluid balance for as many patients as possible. Our strategy to expand our therapeutic focus to include heart failure and pediatric patients, in addition to those suffering from acute needs in the critical care setting, personifies our corporate goal to become the new well for brighter today and better tomorrows. And thirdly, last week, we announced a research and development collaboration agreement to design and develop a fully integrated pediatric continuous renal replacement therapy device that will expand our current indication to include children weighing less than 20 kilograms. In previous earnings calls, we have communicated our commitment to the pediatric segment. In addition, our vision states that we are dedicated to transforming the lives of patients suffering from fluid overload through Koronis Biomedical Technologies as an example of how we are fulfilling our vision. This fully integrated pediatric continuous renal replacement therapy device will be funded in part by a $1.7 million grant from the National Institutes of Health. We are excited to partner with Koronis Biomedical Technologies in designing and developing this product to better care for babies with limited kidney function. Now turning to the business update. In the second quarter of 2021, we generated a record of $2.5 million in total revenue, representing growth of 35% over the prior-year period. As a reminder, unlike many businesses during the pandemic, Nuwellis showed low double digits in the second quarter of 2020 compared to 2019. Therefore, when comparing the second quarter of 2021 revenue to the comparable period in 2019, sales increased 50% over the two-year period. This demonstrates the soundness of our growth strategy to expand into pediatric and drive increased utilization among critical care customers. On a sequential basis, revenue increased 31% compared to the first quarter of 2021, with strong sequential growth across all segments, most notably, heart failure, which I will speak to shortly. As mentioned in last quarter's call, our revenue mix has meaningfully shifted given our strong commercial execution to expand into critical care and pediatric accounts. In the second quarter of 2021, our revenue mix was comprised of 41% critical care, 33% pediatric and 24% heart failure. Now I will provide further details on each business segment, starting with Critical Care. Critical Care continued its strong momentum, having now realized three consecutive quarters of sequential growth and segment quarterly revenues now approaching $1 million. This remains one of our top-performing segments, driven by increased utilization and unit replacements of our newest generation Aquadex system in hospital ICUs across the country. As I have previously alluded to, given the comfort level and familiarity that these accounts have developed over the course of the pandemic, we are realizing increased levels of utilization among non-Covid critically ill patients. Due to this synergistic effect of our Aquadex system's capability to treat Covid critically ill patients, we have been able to meaningfully drive demand and utilization within the critical care segment, primarily treating non-Covid critically ill patients. With Covid cases in the U.S. having significantly declined since the vaccine rollout, we view this utilization trend to be favorable and expect it to be durable as the company continues to build awareness of the clinical benefits of the Aquadex system in treating patients in the ICU. Now moving to our Pediatric business. Increased penetration and utilization in established accounts, combined with adoption by new customers, resulted in our second straight quarter of strong double-digit sequential revenue growth in Pediatrics. Our ability to sell additional Aquadex units and increase consumable volumes at established accounts is tangible validation that our technology is a vital tool physicians can rely on to improve the lives of children. One pattern that we often observe is that when a hospital treats just one child suffering from fluid overload and witnesses the benefits of the Aquadex SmartFlow system, they adopt it for use in treating more children. While only 18 months prior into our market development of Aquadex treating children with fluid overload, we remain optimistic about its prospects and highlight the significant untapped opportunity within pediatric hospitals. Transitioning to our pediatric registry, which was initiated in January, as of today, we have selected eight of the ten total institutions to participate in this registry and are actively enrolling patients at four of them. The registry is designed to collect real-world evidence on the use of the Aquadex SmartFlow Ultrafiltration system in pediatric patients with fluid overload. The registry will include data on Ultrafiltration utility, performance, and safety profile for up to 500 pediatric patients weighing over 20 kilograms over a 2.5-year period. We are grateful to partner with organizations like Joe DiMaggio Children's Hospital, Children's of Alabama, Cincinnati Children's Hospital, and the Adult Children's Hospital, all of whom have started enrolling patients in this registry as part of our commitment to improve and customize pediatric care with the Aquadex SmartFlow system. 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. Turning now to our Heart Failure business. You may recall from our last earnings call that sales of the Heart Failure segment declined sequentially from the fourth quarter of 2020 to the first quarter of this year. We attribute that to Covid's impact on heart failure patient behavior, overall procedure volumes, and our limited access to hospitals. At that time, we anticipated this segment would recover over the remainder of 2021, fueled by more normalized patient behavior and increased access to hospitals due to declining Covid infection rates and additional clinical evidence demonstrating the therapeutic benefits of Aquadex therapy. This played out as we expected, resulting in Heart Failure having the fastest pace of sequential growth among our segments during the second quarter. Regarding our continued progress building a body of clinical evidence, supporting Ultrafiltration, the 2021 American College of Cardiology Conference included a presentation of data supporting the effectiveness of our Aquadex FlexFlow system in the treatment of acutely decompensated heart failure patients. The single-center study evaluated 30 acutely decompensated heart failure patients in a mainstream setting who were treated with the Aquadex therapy. This study showed a significant weight decrease and fluid removal without affecting kidney function. More specifically, the study reported a mean fluid removal of almost 9.5 liters and 16 pounds of mean weight loss. Additionally, the authors reported a hospital readmission rate of 17% at 30 days post-treatment compared to the national average of 25%, a reduction of almost 50% in hospital readmission at 30 days. This strengthens supporting evidence discussed during the last quarter's call and demonstrates the impressive benefits to patients and to the overall healthcare system, even in the first year following treatment with the Aquadex therapy. I'm also excited to announce that in July of this year, the American Medical Association issued a Category III CPT code, commonly known as a Category III or T code for the use of therapeutic Ultrafiltration. These codes are issued for emerging technologies, services, or procedures, and they allow for data collection to substantiate more widespread usage. They also allow healthcare providers to obtain reimbursement and develop pathways to eventually pursue a Category I code. Obtaining this new T code, which goes into effect January 1, 2022, marks a significant step towards advancing the commercialization of the Aquadex therapy into a standard of care. It is also important to point out that while this CPT code applies to outpatient procedures, reimbursement is still provided via DRG codes for inpatient care, which is the primary application of our therapy today. That said, we believe patient access to Ultrafiltration through the outpatient market represents a sizable opportunity and addresses a significant problem for hospitals and heart failure patients that we are uniquely positioned to solve. We believe earlier intervention in the outpatient setting, via peripheral venous access will reduce overall hospitalizations, improve patients' quality of life, and lessen the burden on the overall healthcare system. Reimbursement is an integral aspect of hospital administration decision-making and can play a huge role in whether patients have access to life-saving technologies. As Dr. Maria DeVita said in the press release, "If it is, if it were entirely up to the providers, we would always use the most innovative technologies to treat our patients. Yet, the reality is the healthcare system is immensely dynamic and components such as reimbursement must be considered when choosing the best tools to include in our armament. This reimbursement opens access to more hospitals and ultimately, patients across the nation who otherwise may not have had access to Ultrafiltration, and that is news worth celebrating." We appreciate the recognition of the therapeutic benefits of Ultrafiltration by the medical societies who endorse the application, and we are confident the Category III CPT code will enable patients' access to our adoption by providers who prescribe Ultrafiltration for their fluid-overloaded patients. During the second quarter, we also announced a three-year national purchase agreement with Premier Inc., one of the nation's largest group purchasing organizations. Specifically, Nuwellis and Premier partnered to create a new aquapheresis category, which allows Premier members to purchase Aquadex SmartFlow consoles at a pre-negotiated price. Aquadex is the first and only therapy currently available in this newly established aquapheresis product category. The collaboration provides Nuwellis with the opportunity to expand into many of the thousands of hospitals with which Premier holds relationships. Premier is a trusted healthcare leader, and working with it to expand access to Ultrafiltration with the Aquadex is a significant milestone for the company and the customers we serve. When you pull it all together, you can see many signs of progress in executing our strategy and of ultimately making Aquadex therapy the standard of care for fluid management. We continue to build supporting clinical evidence, establish the foundation for appropriate reimbursement, expand commercial relationships, and develop differentiated products. You also see in our financial results, the details of which George will take you through now.

George Montague, CFO

Thank you, Nestor, and good morning, everyone. I'm glad to be part of Nuwellis and look forward to helping the business achieve its potential as it transforms the lives of patients suffering from fluid overload through science, collaboration, and innovation. Turning to our financial results. Revenue for the second quarter was $2.5 million, up 35% from Q2 of last year and 50% above the second quarter of 2019, which we consider a pre-Covid baseline. Revenue performance for the quarter was driven by increased capital sales and strong utilization of disposables across all our segments. Regarding our gross margin and operating costs, I will briefly comment about major drivers. First, our gross margin was 60.2% for the second quarter of 2021. As mentioned in previous earnings calls, gross margin is heavily dependent on volume and the revenue mix between capital equipment and disposable circuits. Sales growth during the second quarter resulted in higher sequential production volumes, which benefited gross margin, increasing it from the 50.4% reported in the first quarter of 2021 and the 54.5% reported for the fiscal year 2020. However, it was below the 64.4% reported in the second quarter of 2020 due to a production ramp last year to support the launch of the Aquadex SmartFlow system and to meet expected future demand increases. Next, regarding our SG&A expenses. Q2 2021 expenses were $5.1 million, an increase of 20% over the second quarter of 2020. The increase in SG&A expense was primarily due to our continued investment in sales and marketing activities, along with nonrecurring leadership transition costs. Our research and development expenses were $1.2 million in the second quarter of 2021, a 33% increase compared to Q2 of last year. The increase in R&D expenses over the prior year was primarily driven by investments in new products and clinical support of our pediatric registry. The net loss for the quarter was $4.7 million or $0.72 per share compared to a net loss in the second quarter of 2020 of $2.9 million or $3.10 per share based on adjusted share count. Regarding our liquidity position, we used $3.9 million of cash in the second quarter to finance our operations, and we ended June with $24 million of cash and marketable securities. Looking forward to our projection for the remainder of 2021, we continue to closely monitor the situation caused by the Covid 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're planning for quarterly revenues to continue increasing sequentially for the remainder of the year. On an annual basis, we expect our gross margin to continue to benefit from increased volumes, although the eventual product mix will also have an impact. I will now turn the call back to Nestor for some final remarks.

Nestor Jaramillo, CEO

For my final remarks, I want to communicate that Nuwellis is financially stable and entering an exciting new phase with significant opportunities in Critical Care, Pediatrics, and Heart Failure. We have sufficient cash in 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 six quarters, thanks to our expansion into Pediatrics and Critical Care. Now that we have a dedicated CPT code to treat patients suffering from fluid overload, we believe our Heart Failure business is poised to accelerate in 2022. I want to thank you for joining our second quarter conference call, and I wish you all a good day. Operator, you can open the call for questions.

Jeffrey Cohen, Analyst

I have a number of questions. I would start with Pediatrics. Could you provide us with the current number of accounts in the Pediatric space and how you view that in relation to penetration rates? Additionally, could you share some insights on recent utilization trends and the state of staffing in that sector?

Nestor Jaramillo, CEO

Good question, Jeff. First of all, we don't want to give any exact numbers of how many accounts we have opened on a quarterly basis. We will do that at the end of the year. But we've seen, Jeff, that once a hospital treats their first baby, and they see the clinical benefits that they receive from Aquadex, they immediately purchase additional consoles to treat more children. In our current accounts, we see the same situation, where they are buying more consoles to treat more children. In some of our hospitals, they have up to five, six consoles. And in many times during the quarter, they will have four to five different patients under treatment.

Jeffrey Cohen, Analyst

And then give us a sense of the registry in Pediatrics that you mentioned. So it sounds like eight out of ten have IRBs in place and four are enrolling currently. Can you give us a sense of how many are enrolled? And how do you expect that to fill out on the enrollment numbers over the coming quarters?

Nestor Jaramillo, CEO

We have approximately six to eight patients enrolled in the registry as of today. And as they treat more children, we will see an increase in the number of patients enrolled in the registry.

Jeffrey Cohen, Analyst

And what's the total expected to be for the trial?

Nestor Jaramillo, CEO

500 patients.

Jeffrey Cohen, Analyst

And they'll be followed for 2.5 years? Is the follow-up?

Nestor Jaramillo, CEO

That's correct. With the follow-up, yes. But we expect about 2.5 years to enroll the patients and also to do the follow-up.

Jeffrey Cohen, Analyst

Are you observing new installations of the SmartFlow systems in the field with your commercial team, or are some of these also upgrades and replacements?

Nestor Jaramillo, CEO

Both. We see new accounts purchasing SmartFlows for the first time, but we've also seen a number of accounts that are replacing the FlexFlow with the new generation SmartFlow. So it's both new accounts purchasing the SmartFlow as well as current accounts replacing their old generation.

Jeffrey Cohen, Analyst

And then you spoke a little bit about ASCs. Has there been any replacements to date specific for ASCs that you're seeing or current facilities that are taking units and pushing them out to their own ASCs?

Nestor Jaramillo, CEO

That's a good question, Jeff. Since the approval of the CPT code, it is still too early to determine how the outpatient aspect will develop. In the past, we have known of accounts that used the Aquadex in the outpatient setting. I believe those hospitals will continue treating patients in the inpatient setting and also start using it in the outpatient setting again.

Jeffrey Cohen, Analyst

Could you provide some information about the Premier arrangement? Is it set for three years? Are there any minimum requirements regarding units or utilization? And what timeline should we expect for the rollout from their side?

Nestor Jaramillo, CEO

Good question. I'm going to start with the latter part of your question. We're starting to see implementations right now in the members of that participate in the Premier relationship. And we believe that this is going to continue improving access for this therapy in those accounts that either have used the therapy before or will start using the therapy.

Anthony Vendetti, Analyst

I just want to see, so on the CPT code, Nestor. So you have a Category III code that goes into effect January 1. Do you have a plan to obtain a Category I code? And can you elaborate on the significance of what that would mean for your business?

Nestor Jaramillo, CEO

Yes, great question, Anthony. The Category III code is designed for emerging technologies and new procedures. Its purpose is to gather data on the usage and costs associated with these therapies. We anticipate collecting data for two to three years before applying for a Category I code, which is our goal. The Category III code remains valid for up to five years, and during this time, we intend to apply for a Category I once we have gathered sufficient information on utilization and cost related to the therapy.

Anthony Vendetti, Analyst

And you're expecting that to be about two to three years, correct?

Nestor Jaramillo, CEO

I would think so, yes. The experience from other companies that have followed the same strategy, that's what it appears to be.

Anthony Vendetti, Analyst

And then just shifting gears to Critical Care. There was obviously a spike initially during the onset of the Covid pandemic. It looks like there might have been a sequential decrease even though the revenues were up year-over-year and certainly up from 2019. Do you expect with the Delta variant and with Covid patients now increasing nationwide, do you expect your Critical Care revenues to not only go up year-over-year but also sequentially? And then as Critical Care has become a significant part of your revenues due to Covid, have you noticed, at least anecdotally, an increase in hospital utilization of the Aquadex system as they have seen the benefits in critical care? And has that translated into more use in Heart Failure? I know your Pediatric is a separate business that's doing well. But have you seen the utilization within a particular hospital increase throughout the hospital?

Nestor Jaramillo, CEO

Absolutely, Anthony. In last Q1 and Q2, we saw a significantly decrease in the utilization of the Aquadex to treat Covid critically ill patients. However, you saw the numbers that in both quarters, our Critical Care numbers went up, and that was due to the treatment of non-Covid critically ill patients in the ICU, no doubt about that. So that synergistic effect of hospitals appreciating the clinical benefit of the Aquadex when treating Covid critically ill patients to treat non-Covid critically ill is very obvious. And we have seen not only anecdotally, but we have seen in the numbers. And when talking to our customers, that's exactly what is happening.

Brooks O'Neil, Analyst

Congratulations on the progress in the quarter. Obviously, I'm pretty new here. So my questions might be a little more basic than Jeff's and Anthony's, I apologize for that up front. But I wanted to start with the CPT code, can you help us to understand what the current reimbursement under the Category III code is likely to be for both doctors and hospitals, #1? #2, do you believe that level of reimbursement will be sufficient to drive increased utilization out there, while the data collection process is underway? And then three, what would the level you hope for be when we move to a Category I code in a couple of years? That's sort of my first set of questions.

Nestor Jaramillo, CEO

I'm going to answer your questions in reverse order. The third question you asked was about whether we expect to see increased utilization once Category I is established. Generally, you can anticipate that this therapy will become a standard of care. For your second question, we believe there will be increased utilization even with Category III in those hospitals using it for heart failure. The first part of your question was about current reimbursement and its implications with Category III. Currently, patients are treated in both inpatient and outpatient settings. In the inpatient setting, hospitals receive payment under a DRG, while physicians may get paid under an unlisted CPT code. However, the unlisted code can be cumbersome, and there’s no guarantee that physicians will be compensated when they submit claims using it. Category III in the inpatient setting will enable physicians to receive payment for the therapy's use, while hospitals will continue receiving DRG payments. In the outpatient setting, up to now, there hasn’t been a CPT code covering treatment, but this new code will allow both hospitals and physicians to be compensated.

Brooks O'Neil, Analyst

So just focusing on the outpatient setting since you finished discussing that, I was curious about the question Jeff raised regarding ASCs. Do you expect outpatient utilization to be primarily in hospital outpatient departments? I notice many outpatient departments located on the first floor of hospitals. Or do you think there will be a shift towards freestanding outpatient centers?

Nestor Jaramillo, CEO

We believe so, Brooks. We know about nine hospitals that were using the Aquadex in the outpatient setting. And with now getting paid for using it in the outpatient is going to increase the utilization and perhaps a shifting from the inpatient to the outpatient if the savings are significant, as you know, when they treat patients in the outpatient setting. Go ahead.

Brooks O'Neil, Analyst

I was just curious, and I get that. I totally understand it's going to be a big deal to save the cost in the outpatient setting. But is it going to be in the hospital outpatient departments? Or is it going to be in freestanding centers, in your opinion?

Nestor Jaramillo, CEO

I understand your question now. We believe that initially, it's going to be in the hospital's outpatient clinics.

Brooks O'Neil, Analyst

And then the last question I had is, you seem particularly excited about the Pediatric opportunity. And I know it's a smaller market on paper in terms of TAM. But could you just explain to us what you think Aquadex brings to the treatment of babies and small children that is not available today and why you're so excited about the opportunity there?

Nestor Jaramillo, CEO

Yes. Right now, Brooks, the Aquadex is an adult device. However, it happens to be the most gentle and the most effective when treating babies and neonates with kidney dysfunction, okay, whether they are born without kidneys or they have renal issues. Because of our gentleness, physicians are using it for these neonates, but it's not the optimal device for pediatrics. They have to use separate pumps on these neonates to feed them with nutrition. So our new device will incorporate those pumps into the device, therefore, better synchronization between the infusion of fluids and the removal of excess fluid. And that's the key with this new device. Well, I want to thank you, everyone, for participating in the Nuwellis second quarter earnings call, and I wish you all a happy day. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.