Electromed Inc (ELMD) 2021 Q2 法說會逐字稿

Greetings, and welcome to the Electromed Second Quarter Fiscal 2021 Financial Results Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. It's my pleasure to turn the call over to Devin Sullivan, Investor Relations for Electromed. Please go ahead, Devin.

Thank you, Kevin, and good afternoon, everyone. Electromed's second quarter fiscal 2021 financial results were released today after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company's website at www.smartvest.com.

The company has asked me to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Please refer to the company's SEC filings for further guidance on this matter.

Joining us from Electromed this afternoon are Kathleen Skarvan, President and Chief Executive Officer; and Mike MacCourt, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Mike will present a summary of the company's second quarter fiscal 2021 financial results, and then we will open the call for questions.

It is now my pleasure to turn the call over to Kathleen Skarvan. Kathleen, please go ahead.

Thank you, Devin. Good afternoon, everyone, and thank you for joining us to discuss Electromed's second quarter fiscal 2021 financial results.

We are pleased to report that our net revenue this quarter increased 11.1% year-over-year to a record $9.5 million, driven by 16.1% growth in home care revenue. On the home care side of our business, successful execution of our hybrid virtual and face-to-face selling approach, combined with the ability for prescribers to more easily provide care with the provisional CMS waiver, drove a 16.1% increase in home care revenue compared to the prior year period.

The home care success more than offset the ongoing challenges to the other portions of the business negatively impacted by the pandemic, most clearly seen in the year-over-year decline in our institutional business.

However, compared to the first quarter of our current fiscal year, our business benefited from our sales team's execution of a hybrid virtual and face-to-face selling approach, increased face-to-face interaction between patients and physicians and improved access to clinics for our sales staff. The CMS waiver temporarily relaxes certain rules for prescribing HFCWO devices to the non-commercial Medicare population during the COVID-19 pandemic. With the CMS waiver, we have experienced an increase in approvals for previously noncovered diagnosis and faster approval times for covered diagnosis. Noncommercial Medicare historically represents approximately 50% of our total payor mix for home care revenue. We believe that the CMS waiver has helped offset a challenging and still ever-changing environment related to COVID-19 pandemic that has impacted our sales team execution due to patient face-to-face clinic visit concerns and reduce clinic access for our reps. We were pleased that CMS recently extended this waiver until April of 2021.

An additional positive trend is with our commercial Home care revenue that also increased compared to prior year benefiting from strong sales team execution and an improved on -- and improved on a sequential quarter basis for the same reason, but also due to improved clinic access for sales reps and increased patient face-to-face visits. At the end of the second quarter, we did have 45 field sales employees, of which 38 were direct sales. This compares to 40 total field sales employees, of which 34 were direct sales at the end of the prior year period.

While patient and sales rep access to clinics has remained depressed due to the pandemic, we are communicating the benefits of SmartVest to pulmonologists and end users increasingly via virtual platforms and direct-to-consumer marketing. We continue to gain traction with the following fundamental sales and marketing messages that differentiates SmartVest from the competition as we focus on increasing market share, which, we believe, are key to driving near-term growth.

SmartVest produces less squeezing than competitive devices because it releases more air between compressions, providing greater comfort during HFCWO therapy. SmartVest is associated with a lower risk of respiratory infections, which can be serious or life-threatening and that can result in costly hospital admissions, reducing the comprehensive cost of care. We have published multiple outcome studies demonstrating that bronchiectasis exacerbation rates drop significantly when using our devices. Our latest prospective bronchiectasis outcome study, which was placed on hold last year due to the pandemic, has resumed at 4 sites. Though patient enrollment, understandably, has been slower than normal given COVID-19 concerns.

SmartVest improves quality of life. We are leveraging a growing number of patient, positive testimonials that come directly from them. Here is an example of a patient feedback, and this is Diane, "I wear it twice a day for 20 minutes each. It has been a Godsend and totally turned my life around. I have said it saved my life as I constantly was in the hospital with lung infections. Now I still do the 2 treatments daily as ordered by my doctors, and haven't been in the hospital for 7 years."

Finally, when it comes to customer service and clinician support, we believe Electromed is second to none. We are a premier HFCWO device partner, providing comprehensive patient training and support, while streamlining the ordering process and working with insurers to ensure reimbursement is covered.

Moving to the institutional side of our business, revenue remained challenged due to reduced hospital purchases in light of COVID-19 and precautions related to aerosol spread, but we did register another sequential quarter increase in single-use disposable wrap orders. Our institutional strategy remains unchanged. We are focused on fortifying the hospital call point and strengthening our partnership with the integrated delivery networks. As a reminder, growth in our institutional business should augment our home care revenue as the HFCWO brand used in the hospital is often the default brand prescribed when discharging a patient.

Shifting to the bottom line, we achieved strong second quarter net income of approximately $1.2 million, or $0.13 per diluted share despite higher strategic investments reflected in R&D and SG&A. We are encouraged by this quarter's strong financial results and pleased with our sales team's execution and ability to adapt to ever-changing conditions in the market due to COVID-19 pandemic.

While we continue to operate within the constraints of a pandemic, we are cautiously optimistic about our prospects for continued revenue growth in the second half of fiscal 2021. Against this backdrop, we continue to fund strategic investments for our long-term growth, including research and development on our next-generation device for HFCWO therapy, and expanding our direct-to-patient marketing to increase awareness of bronchiectasis and SmartVest as an effective treatment. We also plan to expand our sales team, beginning recruitment in quarter 4, for 3 to 4 additional direct reps, and continuing the expansion throughout fiscal 2022.

Over the past years, we have benefited from our focus on sales rep productivity, fine-tuned our recruiting profile, revised our onboarding and training to improve time-to-productivity and return on investment. Our planned sales team expansion will incorporate metrics to measure and manage new sales reps to maximize our return on investment.

In closing, this quarter, we continued to successfully navigate COVID-19 challenges and could not have done so without the amazing dedication of our employees, whose health, safety and well-being remained our top priority. Non-cystic fibrosis bronchiectasis represents a significant and growing market opportunity, estimated at more than 4 million individuals here in the United States. For those of you who are new to the Electromed story, we believe that approximately 630,000 people with a bronchiectasis diagnosis could benefit from HFCWO therapy, yet only an estimated 77,000 patients in the Medicare population are currently being treated with the device like SmartVest. The growing body of clinical evidence, combined with the powerful patient testimonies that we routinely hear, support the use of our SmartVest as a standard of care among individuals with bronchiectasis. In this context, we are committed to delivering long-term profitable growth, while maintaining the highest standards of integrity, respect and privacy.

With that, I will turn it over to Mike for a more detailed discussion of our financial results.

Thank you, Kathleen, and good afternoon, everyone. As Kathleen shared, our net revenue in the second quarter of fiscal 2021 increased 11.1% to $9.5 million from $8.5 million in the second quarter of fiscal 2020, driven by growth in home care revenue. Home care revenue increased 16.1% to $8.9 million, primarily due to higher referrals and approvals compared to the prior year period.

Institutional revenue decreased 37.4% to $309,000 from $494,000 in the prior year period, primarily due to a decrease in the volume of devices and disposable reps sold due to COVID-19's continued impact on hospital purchasing activity.

Home care distributor revenue increased 13.7% to $149,000 from $131,000 in the prior year period. International revenue, which is not a strategic growth area for Electromed, decreased 46.6% to $135,000 compared to $253,000 in the prior year period.

Gross profit in the second quarter of fiscal 2021 increased 12.7% to $7.5 million or 79.2% of net revenue from $6.7 million or 78.1% of net revenue in the prior year period. The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within the home care market.

Operating expenses, which include SG&A as well as R&D expenses, totaled $5.9 million or 62.6% of revenue in the second quarter of fiscal 2021 compared with $5.1 million or 59.8% of revenue in the same period of the prior year. SG&A expenses increased 9.5% to $5.4 million in the second quarter of fiscal 2021 from $5 million in the same period of the prior year, primarily due to increased payroll and compensation-related expenses associated with higher incentive payments on stronger home care revenue and higher average sales and marketing headcount as well as increased direct-to-consumer marketing expenses, partially offset by lower travel, meals and entertainment expenses.

R&D expenses increased to $507,000 or 5.3% of net revenue in the second quarter of fiscal 2021 from $143,000 or 1.7% of net revenue in the prior year comparable period, primarily due to investment in our next-generation product development. We estimate that R&D expenses will be in the 4% to 6% of net revenue range for the duration of fiscal 2021.

Operating income totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. Net income before income tax expense totaled approximately $1.6 million in both the second quarter of fiscal 2021 and the second quarter of fiscal 2020. In the quarter, income tax expense totaled $389,000 compared to $419,000 in the same period of the prior year. Our effective tax rate in the second quarter of fiscal 2021 was 24.4% compared to 26.1% in the prior year period.

Our net income totaled $1.2 million or $0.13 per diluted share in the second quarter of fiscal 2021 compared to $1.2 million or $0.14 per diluted share in the prior year period.

Now moving on to the balance sheet and operating cash flow. Our balance sheet on December 31, 2020, included cash and cash equivalents of $11.7 million, no long-term debt, working capital of $27.4 million and shareholders' equity of $32.3 million. Cash flow from operations in the second quarter of fiscal 2021 totaled $669,000 compared to $1.4 million in the comparable prior year period. Cash flow from operations was impacted by a $1.8 million increase in accounts receivable compared to the end of the prior quarter, primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle. The Medicare portion of home care is high-quality accounts receivable, and we expect this revenue to convert to future cash flow at similar ratios as prior periods.

We are pleased to be debt-free and with a strong balance sheet to support our long-term growth strategies. We are currently evaluating options regarding the optimal use of our cash to maximize shareholder value, and we expect to share more specific strategies for the use of our cash by the end of fiscal year 2021.

This concludes our prepared remarks. Operator, please start the Q&A portion of the call.

(Operator Instructions)

Our first question today is coming from Kyle Bauser from Colliers.

Great to see that the CMS waiver was extended. Is it reasonable to assume this should continue to be extended? And even if it wasn't, do you think there'll be some lasting efforts to it? It seems like the turnaround has become very quick for the Medicare channel. Just kind of wondering how you think that plays out?

Kyle, thank you for the question. So yes, the CMS waiver is really an interesting dynamic that's been a positive outcome for many, many patients since the pandemic. And so we think about the waiver as, yes, it's tied with the public health emergency. And so with the public health emergency being extended in 90-day increments, we would expect as long as there still are many people that haven't been vaccinated, I can't see into the mind of health and human services specifically, but I think the Biden Administration is going to be as positive as possible in doing everything that will help us to get through the pandemic as easily as possible and with the benefits that have been in place that they'll continue. So I do think there's a strong chance that it will continue for a period of time yet.

And as far as the benefits, we would describe the benefits in a couple of ways. For sure, patients are benefiting with those that may not have had a diagnosis that was reimbursed in the past for those noncommercial Medicare patients. And previously, we would receive those, but we would have to push those into an appeal process, as you know. So now, those patients and quite a few of them are COPD patients, as you can imagine since there are many COPD patients with a phenotype, where they do have mucociliary issues, they have frequent exacerbations, they're frequently hospitalized with lower respiratory infections. And so now the physician has the opportunity to prescribe a therapy that they know will benefit that patient, and they also know that, that patient will receive reimbursement. And so we're going to take that information that -- we're going to take that physician who may have been maybe reluctant to prescribe maybe because they thought it was burdensome to manage the medical records that are needed for reimbursement of the requirements. And we're going to provide that physician 5-, 30- and 90-day feedback on their COPD patient or their noncovered diagnosis patient. And we're going to be able to show them what the value is for that patient. And while we're doing that, we're going to continue educating them on how reimbursement works for those noncommercial Medicare patients. And we were just really pleased this quarter to see that our commercial payor, where that waiver doesn't apply, that, that even grew sequentially and year-over-year. So those are ways that we're looking at this as a longer-term benefit even if the CMS waiver goes away.

And then finally, not to be so long-winded, but I do want to mention that we think of the waiver as an offset to the issues that are keeping our sales reps from being able to access clinics right now during the pandemic and also due to some of those patients that are reluctant to go in face-to-face. So I think there's multiple wins, but thank you for the questions.

Interesting. And I appreciate that. And then remind me on the status of enhancements to the SmartVest. Are these something that you envision talking about ahead of a potential 510(k) clearance? Or is this something that we'll learn about upon clearance and I should just stop asking?

Well, you can always ask, Kyle, right?

Right.

So I think that we will be quite close to the vest or the chest on sharing much about what those new benefits may be from our next-generation product. I think, for competitive reasons, we certainly want to be doing that. And also that before we have clearance, we wouldn't want to share what possible claims could be or those performance or feature and benefit enhancements. So yes, I think we will be waiting until that time frame.

Got it. Understood. That makes sense. And then just lastly, there's some really good testimonials out there, places like YouTube, that highlight the clear advantages of SmartVest over the competition, pretty compelling cases. I'm curious if you have a sense for where your new business is coming from. So if we're talking just new business, what percent, I guess, ballpark is coming from taking share versus actually growing up the bronchiectasis and COPD market?

Yes. Thank you again for that question, Kyle. So we do measure the percent of our referrals that are coming in from a current prescriber for SmartVest and those that have not prescribed SmartVest over the last year to 2 years. And so if we would look at that data, I can tell you that about -- almost half of our referrals now are coming in from previously -- from prescribers that previously were not prescribing SmartVest. And that's across a number of physicians in a number of clinics, but that can give you some sense of based on the way we're being able -- we're able to track that -- those referrals, I wouldn't say that's all market share necessarily, but you can get some sense that there is some momentum building around market share.

(Operator Instructions)

Our next question today is coming from James Terwilliger from Northland Capital.

Can you guys hear me?

We can, James. Nice to hear from you.

Nice job with the numbers. I mean, a very nice quarter, in my opinion, in both year-over-year and sequential growth. I don't want to box you in, in terms of guidance, but how should -- because these numbers, in my opinion, are so strong, how should we think of the second half of fiscal 2021 with all the different moving parts with your true internal growth rate if you're developing the market with COVID, the new Biden Administration, can you give any high-level expertise on how we should think of maybe the second half of fiscal 2021?

Well, I think you answered some of your own question there. It's quite -- there's so many variables right now, James. Again, we did say that we are positioned to grow if -- the second half compared to prior year. But to put something definitive around that at this point based on that uncertainty is something that we're going to -- we're going to be less precise about that right now.

No, I understand. And again, you've got to manage what's coming through the door. Is there any type of seasonality as we move kind of here just closing out the December month going into the colder months of March and then moving out? Is there any type of seasonality in your core business with your with what you're treating?

Yes. So in the past, James, we have often seen the March quarter be one of our seasonally higher quarters and that was often, we believe, linked to the influenza season. And so you might have more people with bronchiectasis or COPD or other lung function issues that might be more susceptible to influenza. And so they're going in to see their doctor and that's at a point where the doc says, hey, now is a good time for us to prescribe HFCWO or SmartVest. As you know, the influenza season is not here like it was in years past due to the fact that people are staying home, they're not socializing and they're wearing masks. So we're not expecting that same type of seasonality necessarily.

Okay. That helps a lot, and that makes complete sense. And then just kind of lastly, at a high level, with this waiver, which makes tremendous sense, is this -- 2 questions here. One, I would think this is expanding and growing your TAM, your total addressable market. And two, once they open the door to this type of treatment, is it going to be hard for them to maybe close the door if they expand some of the clinical indications that you can treat and address and help human beings?

Well, I think it's a great question. And we've been giving that -- we've been exploring that situation here in depth, and we've been talking to a number of people in the industry to understand better when CMS has a waiver like this in place for as long as they did, how easily is it to go back to what was historically the requirements. And so stay tuned, we'll continue to provide updates on these calls if we're learning more about what that potential might be for an extension or if this is -- if these might be -- if this might now be a phenotype that would continue being approved for HFCWO in the future. But right now, again, we're exploring what that might look like, but it's unknown at this time.

(Operator Instructions)

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

We'd like to thank you all for participating on our call this afternoon. We look forward to reporting back to you in May, when we'll release our third quarter fiscal 2021 financial results. Have a good evening.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.