Nyxoah SA Q3 FY2022 Earnings Call

Thank you, Michelle. Good afternoon and good evening, everyone, and welcome to our earnings call for the third quarter of 2022. Participating from the company today will be Olivier Taelman, Chief Executive Officer, and Loïc Moreau, Chief Financial Officer. During the call, we will discuss our operating activities and review our third quarter financial results released after US markets closed today, after which we'll host a question-and-answer session. The press release can be found on the Investor Relations section of our website, and this call is being recorded and will be archived in the Events section of our Investor Relations website. Before we begin, I would like to remind you that any statements that relate to expectations or predictions of future events, market trends, 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. Our 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. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our Form 20-F filed with the Securities and Exchange Commission on March 24, 2022. With that, I would like to turn the call over to Olivier.

Thank you, Jeremy. Good afternoon and good evening, everyone. And thank you for joining us for our third quarter of 2022 earnings call. As an overview of the third quarter, I'm happy to report that we are on the verge of closing implants in our US pivotal study, DREAM. And we remain on track to have 12-month clinical data in fall 2023. We have also commenced our US ACCESS trial for complete concentric collapse or CCC patients, with first implants expected before year-end. Commercially, demand for Genio in Germany remains robust, and we keep showing growth in opening new sites. This reconfirms our confidence exiting 2022 as market leaders in Germany. Let's first begin with a fact-based summary of our Q3 achievements. To date, we have implanted 110 patients in our DREAM trial, with the remainder to be completed in the coming weeks. This will start the clock to generating 12-month efficacy data next fall. From a regulatory perspective, we plan to submit the first three modules of our modular PMA prior to having clinical data next fall. We reiterate our timeline of regulatory approval in the second quarter of 2024. We have begun activating sites in our US ACCESS pivotal study focused on complete concentric collapse patients and continue to expect initial implants before the year-end. As a reminder, CCC patients represent approximately 30% of hypoglossal nerve stimulation eligible to treat OSA patients who are contraindicated to commercially available HGNS therapy in the US and who currently have no suitable treatment option other than major palate surgery. Commercially, in Germany, demand for Genio remains high. We activated six new commercial sites in Germany during the third quarter, bringing our total to 32 active sites. We expect a very strong fourth quarter with up to 40 active sites by year-end. That said, we were supply constrained due to a temporary issue at one of our component providers, which I will detail shortly. That resulted in us postponing availability of inventory in Germany. The US DREAM trial was never impacted by this inventory constraint. As a result, we reported sales of €182,000, well below underlying demand. This is not reflective of the progress our commercial team has made as we received additional purchase orders of roughly €700,000 that remained open at quarter-end. Importantly, the supply issue has been remediated, and the vast majority of the orders that were open have since been filled. Notably, despite the supply constraint, with combined third quarter open orders and reported sales, we estimate that our share remains consistent with the second quarter. What makes me even happier is to see the demand in Q4 remains high. This strengthens our confidence to be the market leader exiting 2022 in Germany. Now, let me start with a review of our first priority and update of our two pivotal ID studies in the US, DREAM and ACCESS. In the DREAM study, to date, we have completed 110 of the 115 implants, with the remaining five implants scheduled for the next few weeks. We remain on track to have 12-month clinical data from the study in the fall of 2023, with regulatory approval expected in the second quarter of 2024. As discussed previously, we are pursuing a modular PMA process. We are preparing the first module and anticipate submitting it in early 2023. In the meantime, we have already begun investing in our US market ACCESS organization to ensure reimbursement upon approval. As for our ACCESS study for complete concentric collapse patients, we are now activating clinical sites. As a reminder, we plan to implant up to 106 patients across up to 40 clinical sites in the US. These CCC patients, who represent 30% of the eligible to treat hypoglossal nerve stimulation OSA population, are currently contraindicated for hypoglossal nerve stimulation in the US, and therefore, their only treatment option after failing CPAP is major palate surgery. With a CCC label, not only will these CCC patients be eligible for hypoglossal nerve stimulation therapy, but all Genio patients will no longer have to undergo a drug-induced sleep endoscopy, or DISE, since determining CCC will no longer be a prerequisite to getting an implant. In Europe, where we already obtained a CCC indication, physicians and patients are already benefiting from no need for the DISE procedure. This is a true demonstration of our patient-first approach to OSA therapy. Not only are we providing a much less invasive treatment option for CCC patients, but we're also streamlining the path to hypoglossal nerve stimulation therapy for all Genio patients by eliminating the need for the DISE or any procedure to diagnose CCC. We still anticipate initial implants before year-end, and we expect to complete all 106 implants in ACCESS within a year for several reasons. First, we already have a database of patients who screened out of DREAM because DISE showed they have CCC. Second, we will have more opportunities to enroll patients since we will activate up to 40 sites versus 20 sites for DREAM. Third, there are no hypoglossal nerve stimulation alternatives for CCC patients, so there will be no competition for these cases. Fourth, home sleep tests will be used to qualify patients, and we have learned a great deal from DREAM in how to move patients to the funnel more efficiently, from enrollment all the way to implant. We continue to expect regulatory approval in the first half of 2025, roughly one year after the non-CCC approval we expect coming from DREAM. Importantly, we are generating growing interest and enthusiasm within the clinical community as we move closer to US commercialization. This was evidenced by more than 90 EMT surgeons and sleep physicians who attended our symposium at the AAO HNS Congress in Philadelphia in September. Nyxoah's patient-centric approach, which includes full body MRI compatibility, a lidless system, bilateral stimulation, and a non-implantable pulse generator—a scalable platform—is resonating very well with the US clinical community. I would like to thank the entire Nyxoah team for their great work and focus on execution as we continue to advance the Nyxoah story. Moving on to the second priority, our European commercial launch, focused primarily in Germany. Germany is the largest and most competitive hypoglossal nerve stimulation market outside of the United States. Nyxoah has a dedicated German sales and marketing team of 15 people and, similar to DRG, a reimbursement level at the same price point as other hypoglossal nerve stimulation technologies. We have defined our commercial success by becoming market leaders by the end of 2022. As I mentioned earlier, during the third quarter, we experienced a temporary supply disruption in Europe, as one of our component suppliers had a malfunctioning machine. This has been solved. To further optimize our supply chain this quarter, we are bolstering our Israeli manufacturing capacity with a second site in Belgium and have sufficient capacity to meet demand. Additionally, we are in the process of adding a third production line in the US with a well-known contract manufacturer. That said, during the third quarter, we postponed the availability of commercial inventory in Germany, and therefore, report sales of €182,000. Underlying demand, however, remains very strong, with about €700,000 of confirmed purchase orders being deferred to the fourth quarter. While I do not plan on providing any fourth quarter guidance, since we never provided any guidance, I think it is important to show that the third quarter supply issue has not dampened demand for Genio. We continue to hear from physicians that because of our label expansion to include patients with complete concentric collapse, they are increasingly opting for Genio as they do not have to perform a drug-induced sleep endoscopy, or DISE, procedure. This drastically shortens the time between diagnosis and implant and removes the burden for both patients and physicians, thus positively impacting access to Genio for patients who are in desperate need of a suitable solution for their OSA. We also launched the program called Care4 in Germany. Care4 will use the AcuPebble home sleep test to accelerate the pathway to a Genio solution. AcuPebble will be used to confirm a prior PSG for existing CPAP patients, thus enabling them to receive an HGNS implant without waiting up to six months for a confirmatory PSG. To this end, we are hosting an event around the German National Sleep Society Annual Conference in Wiesbaden tomorrow, titled Obstructive Sleep Apnea from Diagnosis to Treatment. This event will be webcast, and information on how to access it is present on our website. Looking at markets outside of Germany this quarter, we commercially implant patients in Switzerland, where we have full reimbursement, including DRG in place. We continue to establish our position as an innovation leader in the OSA space, always putting patients and clinicians first in our R&D strategy. As we have discussed previously, we received regulatory approvals for Genio 2.1, a next generation system, which improves patient comfort and compliance without the need for surgical procedures to replace the implantable component. Genio remains the only scalable hypoglossal nerve stimulation implant which allows patients to always have the most advanced features with their existing implant and, therefore, not have to undergo another surgery. We are also developing future generations of both the implantable stimulators and the activation chip to improve the patient experience. For the implantable stimulator, we are working on an implant for life. As for the activation chip, its design will become more ergonomic and integrate patient and physician feedback. We will provide further updates on these developments as they progress. Now updating you on the Vanderbilt Nyxoah ansa cervicalis collaboration project. We are progressing towards a prototype device and expect to commence a feasibility study in 2023. These efforts embody our mission to build a product pipeline that will enable us to expand the market by offering solutions to current non-responding hypoglossal nerve stimulation patients and non-eligible moderate to severe OSA patients. We look forward to providing periodic updates. With that, I'm pleased to turn the call over to our CFO, Loïc Moreau, who will provide a financial update.

Thank you, Olivier. Good day and good evening to everyone. And thank you for joining us today. Revenue for the third quarter ended September 30, 2022, was €182,000. As Olivier already mentioned, third quarter revenue was impacted by a temporary supply disruption that limited our ability to meet demand in the quarter. The issue has been remediated, and we have filled the vast majority of the open orders with no cancellation. Total cost of goods sold for the third quarter of 2022 was €63,000, implying a gross margin of 65.3%. As a reminder, we continue to expect gross margin to expand over time, in line with other neurostimulation companies, as we achieve greater commercial scale. Total third quarter operating expenses were in line with our plan as we continue to focus on research and development programs. R&D increased by €4.2 million in the third quarter of 2022 from €3.5 million in the third quarter of 2021, mostly due to the development of future generations of Genio. Selling, general, and administrative expenses rose to €4.8 million for the third quarter of 2022 from €4.5 million in the year-ago quarter, due primarily to increased commercial efforts in Germany and other European markets. We also added headcount to our corporate infrastructure, and expect to continue investing in human capital as we further scale up our organization, particularly our US commercial team. Total operating loss for the third quarter of 2022 was $8.8 million versus $8.1 million in the third quarter of 2021, driven by the delay in the third quarter revenue, the acceleration in our R&D spending, and our commercial and clinical activities. As of September 30, 2022, cash and financial assets totaled €115.4 million compared to €135.5 million on December 31, 2021. Monthly total cash burn was around €3 million during the third quarter, which benefited from foreign exchange tailwinds. We continue to expect monthly cash burn to increase slightly going forward as we commence the ACCESS trial in the US and invest in our direct-to-patient marketing efforts in Germany. With that, I will turn the call back to Olivier.

Thank you, Loïc. I'm extremely proud of how the team responded to the challenges we faced during the third quarter and how strongly we are executing coming out of it. As a result, we are not changing any of our expectations on our key strategic objectives: having DREAM 12-month clinical data available in the fall of 2023, resulting in regulatory approval by summer 2024; implanting our ACCESS patients this quarter and achieving German leadership by the end of the year. This concludes the formal part of our presentation. Operator, I will turn the call over to you to begin our Q&A session.

Our first question comes from Adam Maeder with Piper Sandler.

This is Simran on for Adam. I want to start off on the supply chain disruption that occurred during the quarter. So, when exactly does that occur? And it does sound like you guys have taken the steps to kind of mitigate or prevent that from occurring. What should we be expecting in terms of the second source supplier that you found? And it sounds like additional manufacturing capacity. So, I guess what should we be expecting from a capacity perspective going forward? To follow on there, even if we back in the unfulfilled orders, that still puts Q3 revenue shy of the Street by about €500,000 or so. So can you elaborate on the commercial trends in the quarter, maybe just talk about some of the headwinds that you're seeing in the field or in the commercial organization and then progression month to month, that'd be great as well.

Let me start by answering. Of course, it's very inconvenient when you're facing something that we went through. To answer your question, we saw this issue arise at the end of August with one of our sub-suppliers. I think with a fast-growing company, those kinds of bumps in the road can happen. The important thing is how the team shows their resilience in solving this. I can confirm that the moment we saw this, our quality system immediately picked it up. Next, we solved the issue and started rebuilding to ensure we could maintain a significant supply. On top of this, we have our Belgian manufacturing site that successfully passed its audit. This will definitely increase and ensure we have sufficient manufacturing capacity to meet all clinical and commercial demands, and to build stock going forward. I hope that this answers the first part of your question. Now the next part involves your German revenue expectations for the third quarter. In total, we see that we have maintained a consistent market share with the 28% we reported in the second quarter, despite the procedure deferrals to the fourth quarter. So that's one thing. When it comes to the Street expectation, we never gave any guidance, and we are still not doing this. What I can say is that we still feel very confident that we will have a strong Q4 quarter; on top of that, we also filled the back orders that we saw during quarter three, and therefore, we can exit 2022 in line with analyst consensus expectations.

Just to maybe put a finer point on your comments there. I think I'm seeing consensus revenue about €2 million in Q4 prior to this call. So, it sounds like that should still hold and does also take into account this one-time kind of bolus of unfulfilled orders that we should be expecting to see in Q4. Is that the right way to think about it?

Yes. We want to keep Q4 strong. We want to recover losses from quarter three. Since you're talking specific numbers, the Street consensus for 2022 is $5 million. We still feel very confident that this is within reach.

I guess another question that I had was we understand there was a change to the guidelines in Germany regarding the role of oral appliances and where that fits into the care continuum, and specifically between CPAP and hypoglossal nerve stimulation. Is that correct? And can you level set us there with more details? Like, have you seen an impact on your business? And how could you navigate this dynamic going forward?

In all honesty, we have not seen any impact of this on our business. So, that is all I can comment.

I guess if I could squeeze one last one in here just on DREAM. As I think about the timelines, if you expect to finish implanting all the patients, and I think you said the coming weeks, a 12-month follow up would put you in the late November, kind of December timeframe. So that does sound more like a late 2024 event in terms of when you would finish all of the clinical data work. So Q2 2024 regulatory approval—that does seem tight. So maybe just walk us through that timing and your confidence to reaffirm the timelines here.

First of all, we expect to have 12-month data in fall 2023, so end of November. As you know, this is an open-label study. So we are able to track, monitor, and analyze data in real time. Therefore, we will have the full dataset very soon after the final patient implanted reaches 12 months. Now, on top of this, we talked about a modular PMA, where the first three modules should be submitted, so that by the time we reach November, we only need to add the efficacy module to this. We think it is realistic to expect regulatory approval by the FDA roughly six to seven months after we submit the final module, which aligns with our timeline of getting approval in Q2 2024.

Our next question comes from Jon Block with Stifel.

Maybe just on the first one, Olivier. If the inventory issues did not impact DREAM, which I think you were pretty clear it did not, can you just talk a little bit about what's slowed the enrollment pace? Or maybe I should say the implantation pace in Q3. I think on the prior 2Q call in August, you thought you might be a couple of months away? I think it was maybe four to six or even eight weeks. It looks like it might fall closer to four months, give or take. So is there anything to call out in terms of what slowed down at the centers? Again, it doesn't seem to be a supply issue, but market or competitor-wise, that has caused really just a slight push, if you would, out by a couple of months to the right.

First of all, let me start by confirming that there was never any inventory issue in the US for the DREAM study. So, you picked that up very well. Answering your question, over the last few months, we implemented solutions to existing bottlenecks. I'm sure you recall, during our last earnings calls, we identified two major bottlenecks. One was scheduling PSG slots, and the other one was finding OR time or dealing with OR capacity. For the PSGs and finding the PSG slots, we addressed the bottleneck by working with private sleep centers, and that seems to be working well. When it comes to finding OR planning, yes, I have to admit, there is competition between us and Inspire. They also had a very positive quarter in Q3. We have a lot of overlap with our clinical sites and were impacted from an overcapacity perspective. That also puts this in the right perspective; we reached 110 implants out of 115. The five missing patients are identified. We know where they are and we also know what the OR dates will be like. So I think we did very well already with 110 out of the 115. The five identified will be implanted in the coming weeks, and then the clock can start for the 12-month data.

Maybe just to pivot for the second question, when we think about the eventual US commercialization efforts, is there any change in strategy for you guys if you're number two to market? What changes, if anything? And maybe, Olivier, what can you do along the way to strengthen your hand, publication of papers, better sleep, et cetera, so that when you're there and if you're close to another player, you're all set to go from a commercialization perspective?

First of all, based on the current trends, we're feeling pretty confident that we will be the number two after Inspire in the market. Let me emphasize that. Next, how are we preparing? We are already preparing our future US strategy. As I mentioned, we have already hired a market access director who is working intensively with payers. She is reaching out to Medicare. So she is laying the groundwork for discussions on what kind of CPT codes we'll be using. All this work is ongoing. Additionally, we plan to further invest in hiring commercial leadership in the coming months, so we can build our commercial strategy and identify the right talent for our team. It can sometimes be beneficial to be second because someone has already paved the way for entering the market and introducing hypoglossal nerve stimulation with payers. We definitely think we can benefit from that as well. Today, our focus is on getting the last five implants done, having the clock start ticking, getting regulatory approval in roughly Q2 2024, and making sure that we engage in all necessary proactive activities to build our team and invest in market access.

Our next question comes from Ross Osborn with Cantor Fitzgerald.

Congrats on the progress. So maybe looking at Switzerland, given it accounted for a significant amount of revenue during the quarter, are you able to disclose how many active sites you have there now?

In Germany, we have 32 active sites, and in Switzerland, we had one active site that did implants in Q3. We expect to add three more, so 32 in Germany and one in Switzerland. For Q4, we are going up from one to four in Switzerland and from 32 up to 40 in Germany.

Outside of Switzerland, how are conversations going in Belgium, Italy, Spain?

Outside of Switzerland, we have reimbursement established in Spain and in Finland. For France, I can only applaud Inspire for the progress on introducing hypoglossal nerve stimulation in such a difficult market like France. I also know this will help us build our case in France as well. We have submitted a reimbursement file in Belgium, but we do not expect to be present there in the coming 18 to 24 months. In the Netherlands, we are seeing reimbursement activities ongoing, but also we do not expect anything in the coming 18 months.

Our next question comes from Suraj Kalia with Oppenheimer.

This is Mike on for Suraj. Curious picking up on the centers theme, what gave you the confidence to up your German year-end centers guide from over 35 to over 40? Was it more de novo or existing centers driving the growth? Any company dynamics at play there or just a preference for Genio and bilateral stim?

We observed significant momentum in Germany over the last 6 to 12 months. With an increasing commercial presence and participation in conferences, we saw many sites approaching us, even some we did not anticipate having such high interest in starting with hypoglossal nerve stimulation, particularly with our Genio technology. This increased our site count. As you know, the overall market penetration in Germany is still low, so more enthusiastic sites that can deliver high volume will benefit treating more patients and showing strong market growth.

I know you mentioned the German share was flat sequentially at roughly 28% in Q2. Do you have any targets for where it might be at the end of 2022?

I appreciate the question because I am proud of my German team. We defined our commercial success by aiming to exit 2022 as market leader in Germany. Today, we are roughly at 30% market share, and we are still committed to exiting Q4 as market leaders in Germany. I hope during our next earnings call I can confirm this, and if we do, there will be a very strong celebration in Germany because that would be a significant achievement.

Just thinking about what could possibly go wrong, any staffing shortages in the field today that are impacting PSG labs? And if so, is that impacting procedure volume? Or how is it?

From a staffing perspective, we see a lot of momentum. We currently have 15 dedicated Nyxoah personnel in Germany across sales and marketing. We receive inquiries from centers about investment and hiring. We are investing in the Care4 program, which utilizes home sleep tests to enable faster access to Genio solutions. We are also enhancing our helpline for ENT surgeons to strengthen their referral networks. We believe these investments will contribute to our ongoing growth and reinforce our market leader position.

If I could just squeeze in one last numbers question for Loïc. I realize you don't give guidance in general, but do you see 4Q gross margin as similar to the 65.3% we saw here at 3Q or might there be any component cost or other pressures from the 3Q supply disruption we saw?

As you pointed out, in terms of gross margin, we have 65% in Q3. We expect this gross margin to remain fairly stable in the last quarter with additional volumes we are building at the moment. Therefore, we don't expect any adverse gross margin impact from the supply disruption we experienced in Q3. We resumed production quickly, and we are catching up in terms of production and batches.

At this time, I am showing no further questions. I would now like to turn the conference back to Olivier Taelman for closing remarks.

Thank you. So once again, thank you all for joining and listening, and thank you all for your questions. The conclusion I would like to make is that we see great traction in the DREAM study. We feel confident in presenting our clinical data by fall 2023 and also are not changing any of our timelines for regulatory approval in the US. The manufacturing issue we faced was inconvenient, but we resolved it, and we saw no decrease in demand. We expect a very strong Q4 for our commercial launch in Germany as well. Once again, I can only thank the team. We will continue executing strongly, and we look forward to reporting on our Q4 results during the next earnings call. Thank you all.

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