Nuwellis Inc (NUWE) 2017 Q3 法說會逐字稿

Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Third Quarter Ended September 30, 2017. (Operator Instructions) Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the end of the call.

I would now like to turn the conference over to Scott Gordon, President of CORE IR, the company's investor relations firm. Please go ahead, sir.

Thank you, Andrew, and thank you for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the quarter ended September 30, 2017. With us today are John Erb, the company's CEO and Chairman of the Board; Claudia Drayton, the company's CFO; and Jim Breidenstein, the company's Chief Commercial Officer.

At 8 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended September 30, 2017. If you've not received CHF Solutions' earnings release, please visit the Investors page at www.chf-solutions.com.

During the course of this conference call, the company will be making forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of CHF Solutions 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 not be able to raise the funds necessary for the development and commercialization of its products, that the company may not be able to commercialize the products successfully, that the company may not be able to successfully integrate acquired businesses, that the company may not realize anticipated synergies and benefits from acquired businesses and the other risk factors described under the caption Risk Factors and elsewhere in the company's filings with the Securities and Exchange Commission.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments, or otherwise. You should review the cautionary statements and discussion of risk factors included in the company's press release issued today, the company's latest 10-K, subsequent reports as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors and cautionary statements related to forward-looking statements. For additional discussion of risk factors that could cause actual results to differ materially from management's current expectations and those discussions regarding risk factors as well as a discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company's website at www.chf-solutions.com.

With that said, I would now like to turn the call over to John Erb, CHF Solutions' Chief Executive Officer and Chairman of the Board. John?

Thank you, Scott, and good morning, everyone. Welcome to our third quarter 2017 earnings call and corporate update. We are very pleased with the results of our quarter, the results of our consistent execution of the strategy we implemented after closing on the acquisition of the Aquadex business in Q3 of 2016.

During the quarter, we made important progress on many fronts. First, we released -- we are pleased with the revenue growth of our Aquadex business. Revenue grew 21% in Q3 2017 over pro forma Q3 2016 and 11% over Q2 2017. Revenue growth is the result of our focus on increasing the penetration in our largest hospital accounts by increasing utilization of the Aquadex FlexFlow System in multiple locations and clinical disciplines within each hospital and sales to new customers. We are pleased with our revenue growth during Q3, particularly because our largest territory, the southeast, was significantly impacted by the devastation of Hurricane Irma in early September.

During the quarter, we hired and trained 6 new experienced sales representatives, increasing our direct U.S. sales team to 10 sales territories from just 4 territories in Q2 of 2017. These 6 new sales representatives became active in their new territories in the last month of Q3. We look forward to their many contributions over the quarters to come.

In addition, during the quarter, we exhibited at 2 of the world's largest heart failure society meetings with significant attention and lead generation, including the European Society of Cardiology Congress in Barcelona, Spain, and the Heart Failure Society of America meeting in Dallas, Texas. In September, we announced the initiation of our international distribution with the signing of a distribution agreement with one of the U.K.'s premier cardiovascular distributors.

Also, in September, we held a scientific advisory board, SAB meeting in Chicago with 6 leading -- opinion leading physicians participating: 4 heart failure cardiologists and 2 nephrologists. The purpose of the SAB meeting was to review and provide guidance on the protocol designs for 2 important clinical evaluations, a mechanistic study and a registry, which we anticipate initiating in early 2018.

On the manufacturing front, our manufacturing implementation is going well. During the quarter, we transitioned the manufacturing equipment from Baxter to our facility in Eden Prairie, Minnesota; successfully commissioned the cleanroom and validation builds are underway. We are on schedule to begin building our own finished good inventory by year-end. We expect the in-house manufacturing capability to have a favorable impact on our gross margins as it will alleviate the markup over standard costs charged by Baxter for manufacturing product for us.

The timing and magnitude of gross margin improvements will depend upon exhausting our inventory of finished goods produced by Baxter and our volumes in manufacturing capacity utilization, beginning in 2018.

Finally, as we announced recently, we received notification from NASDAQ that the company is again compliant with all listing requirements and the listing matter has been closed.

Looking ahead, we continue to fine-tune growth strategies to optimize a significant opportunity to impact both improved clinical outcomes and health care cost reduction by giving health care providers an option to diuretics.

Our mission is to improve the quality of life for people suffering from fluid overload, primarily associated with heart failure and related conditions. We provide health care professionals with a sophisticated yet easy-to-use mechanical pump filtration system to remove excess fluid in fluid overloaded heart failure patients and patients with related conditions.

We believe that our technology will provide a competitive advantage in the fluid management market by providing an alternative solution for decongestion and reducing the cost of care relative to other treatment alternatives.

We continue to develop and refine our strategic focus to demonstrate a strong business model by driving revenue. Growing revenue is the key metric employees, shareholders and potential investors will use to judge our performance. In addition to revenues, contribution to funding operations, revenue growth is the most demonstrative metric to manifest a significant business turnaround.

Management has identified 5 critical actions to drive revenue. One is commercial execution; two is enhance product offerings; three is demonstrate health economic advantages; four, provide important new clinical evidence; and five, increase partnerships with key opinion leading physicians.

Number one, commercial execution strategy. We have allocated and plan to continue to allocate resources to build sales and marketing strength and grow the worldwide market for Aquadex FlexFlow System. In the third quarter of 2017, we increased our direct sales force by 6 experienced employees and plan to further expand our direct sales force in 2018. Our trained sales team is focused on sales penetration in large hospital accounts. The Aquadex FlexFlow System can be used in large hospitals in multiple areas, including the emergency department, the heart failure telemetry floor, the intensive care unit and the coronary care unit.

In addition to expanding our direct sales force, we are implementing high-quality customer service support systems and technical servicing to increase support to customers. We have also initiated international distribution and support for our products by entering into a new distribution and service provider agreement with APC Cardiovascular Ltd., a distributor based in United Kingdom.

Number two, enhance product offering strategy. We intend to develop products and product enhancements to improve performance and customer satisfaction. We have several projects currently underway to enhance product performance. We plan to introduce a new peripheral access catheter and enhance the functionality of the [adequate] sensor that is part of the Aquadex FlexFlow System console. We also are working to identify or developing a diagnostic tool for physicians to use during an Aquapheresis therapy to more precisely determine the amount of excess fluid to be removed, the rate of ultrafiltration and when to stop therapy.

Number three, health economic strategy. We plan to support the organization a previously published clinical trial evidence that compares the health care cost impact of using ultrafiltration therapy versus diuretic therapy, primarily majoring hospital cost for patients admitted to the hospital and re-hospitalizations of patients with fluid overload. We plan to publish information on the budgetary impacts to hospitals that adopt the Aquadex FlexFlow System into their continuum of care when treating heart failure patients with fluid overload and whom diuretic therapy has failed.

Number four, new clinical evidence strategy. We plan to expand the body of clinical evidence for Aquapheresis and the Aquadex FlexFlow System to drive adoption and support reimbursement. We plan to initiate an ultrafiltration mechanism of action clinical study to provide scientific evidence on how ultrafiltration effectively decongests patients without causing clinically significant harm to the kidneys. We also plan to initiate a registry to build the individual account evidence sets, identify use patterns and attain customer feedback to support marketing claims regarding clinical efficacy, demonstrating weight reduction, reduced length of hospital stays and reduced readmission rates.

Number five, key opinion leaders strategy. We plan to partner with key opinion leaders to advance medical understanding of ultrafiltration as a therapy for treating fluid overload. We have recruited a scientific advisory board comprised of 6 key opinion leading physicians to help us to develop and implement both the mechanistic clinical study and registry.

We are partnering with the Cardio Renal Society of America in a leadership role, increasing our involvement with the Heart Failure Society of America.

In addition, we are working with several physicians that are implementing hospital observation unit use of the Aquadex FlexFlow System to provide outpatient care for patients that have fluid overload, but may not require hospitalization.

Before I turn the call over to Claudia, I would like to remind you that the Aquadex FlexFlow System consists of 3 primary components: The console pump, which has a $28,500 list price; a onetime use disposable blood circuit set with a list price of $900; and a small dual lumen peripheral catheter that simultaneously withdraws blood and returns filtered blood to the patient's arm.

Aquadex is a unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload who have failed diuretic therapy. Ultrafiltration is a process that removes water and salt from a patient in a manner similar to how the kidney functions.

Fluid overload is a condition that is prevalent in heart failure patients, which can lead to decompensation resulting in lengthy and costly hospitalizations.

There are over 1 million patients hospitalized per year in the U.S. for acute heart failure, and approximately 90% of these patients present with symptoms of fluid overload. Aquadex has been shown in randomized controlled clinical trials to remove more fluid than diuretics and to reduce repeat hospitalizations.

I will now turn the call over to Claudia, who's going to walk you through our Q3 2017 results and financial details. Following that, I will provide some closing remarks and will open the call to questions.

Thanks, John. Good morning, everyone. Turning to the P&L, revenue for the quarter was $957,000, a growth of 21% over the third quarter of 2016 on a pro forma basis and 11% on a sequential basis from the second quarter of 2017.

Sequential growth was driven mainly by growth in our top 20 accounts and from our accounts that were reactivated in the last 3 quarters. The year-over-year growth was driven mainly by revenue from both reactivated accounts and from newly opened accounts.

Our cost of sales reflect the prices paid for inventory under manufacturing and services agreement we signed with Baxter at the time of acquisition. Under this pricing structure, our standard margins are around the mid-60s. As we mentioned previously, earlier in the year, we notified Baxter that they should not initiate new production for us after June 30, 2017. We are currently in the process of starting up manufacturing activities in-house, and we expect to start our own manufacturing during the fourth quarter of 2017.

Included in reported cost of sales are the start-up manufacturing costs related to this manufacturing transition. In addition, we're in the process of buying out the remaining raw materials and finished goods inventory from Baxter. We expect that the margin benefits from the manufacturing transition will begin to materialize in 2018 as we consume the Baxter manufacturing unit and volume -- and production volumes and efficiencies increase.

In terms of other operating expenses. For the third quarter, they totaled $3 million, a decrease of about $1.4 million or 31% improvement over the same period last year. The decrease in expenditures reflect lower clinical spending resulting from the announcement in 2016 that we were no longer enrolling patients in our C-Pulse-related clinical studies, lower transaction costs associated with the acquisition of the Aquadex business in 2016 and our efforts -- and our continued efforts to consolidate and streamline activities in all areas of the company, partially offset by increased investments in the sales and marketing organization.

The net loss for the period was $2.8 million compared to a net loss of $3.9 million for the third quarter of 2016, a 20% improvement over -- from last year.

Regarding our liquidity position. Our operating cash utilization for the next 9 months of the year was $8.8 million, an improvement of 35% from the same period a year ago. We ended the quarter with approximately $2.5 million in cash and cash equivalents and no debt.

In terms of modeling Q4, we expect revenue to continue to accelerate and expect that our newly hired sales force and efforts to revitalize the business will begin to pay off. Regarding our gross margins, they will continue to reflect the inventory pricing paid to Baxter as we sell-through the existing inventory and prepare to begin our manufacturing in-house.

Gross margins will also continue to include the start-up costs associated with readying our operations to successfully transition the manufacturing in-house. Regarding operating expenses, we expect to make some modest investments in Q4, mainly to fine-tune the investments we made in Q3 in the field and in manufacturing operations.

I will now turn the call back over to John.

Thank you, Claudia. Before opening the call for questions, let me reiterate that we continue to be very optimistic about our future. We know we have a lot of work ahead of us, but we believe we are headed in the right strategic direction. The entire management team is rising to the challenges, and we are focused on delivering results. We will continue to provide you milestones to track our progress over the coming quarters.

Operator, please open the call to questions.

(Operator Instructions) And we have a question from the line of Jeffrey Cohen with Ladenburg Thalmann.

So could you talk a little bit about number of systems, number of facilities currently? How that outlook looks from your perspective? And also could you give us any flavor as far as any outpatient settings as opposed to inpatient settings?

Yes. Sure, Jeff. This is Jim. The team is continuingly to grow and add new systems and also add new accounts and new customers. Our main focus, as you may recall from prior earnings calls, is to drive deep account penetration in our existing database or existing number of customers that we have out there. So we have -- still have approximately 500 systems deployed across the U.S. in nearly 300 different institutions across the country. In terms of the outpatient setting, we are focused currently on the inpatient settings as part of our overall deep account penetration strategy. We do feel that there's an opportunity for us in the future. We're optimistic and enthused about it. And we feel with the right research and the right health care economics, the market may expedite that for us in the future.

Okay, got it. And could you talk more specifically about what floors or what critical areas of cardiac and hospitals where you're seeing the most use and utilization? And can you talk a little bit about any utilization trends at existing facilities?

Yes. Sure can, Jeff. Thanks, and great question. One of the benefits of our technology is that it's portable, number one. So it can be used in different clinical settings in the hospital. We are currently focused primarily in the heart failure setting. And we're also being currently utilized in the post-operative care where patients have failed and continue to fail diuretics. But we're also can be used in the telemetry or step-down units, if you will, and even in the emergency room, emergency departments. And we're seeing utilization increase as the numbers reflect in all those departments where each individual institution is specializing or utilizing our technology.

Okay, got it. And could you guys discuss a little bit about the manufacturing and the equipment transition and the validation process? So that will be concluded in the fourth quarter or the first quarter and the ramifications upon margins, ramifications upon money spent? And could you also discuss the new catheter that you're talking about? And will you be manufacturing that? And what would be the time frame beyond that as well?

Well, let me start off with the manufacturing transition from Baxter to our facility went very, very smoothly. It was really a matter of notifying Baxter to shutdown production. They took 2 weeks basically to decommission equipment. Then, we put it on trucks, brought it over. It's only about a 15-minute drive to our facility. We set it up and began the commissioning process on our side. So it's been basically right on schedule. The schedule is basically to begin producing finished product in the fourth quarter. And we will be definitely doing that. So we're onboard there. The inventory, we've actually purchased inventory from Baxter to take this into the first quarter of next year to make sure we had a cushion of finished goods to cover that transition. And as we began to manufacture our product and put it into inventory into fourth quarter, we'll use up the Baxter. It's a first-in, first-out process. We'll use up the Baxter inventory first, and then our inventory will flow through, sometime beginning in the first quarter of 2018. And that's when we'll see the margin improvements basically because of the reduced cost of manufacturing. Again, so right on schedule. And things have gone very, very well; got a great team that's been very, very efficient and effective and -- of that transition. We actually have gone out and looked at off-the-shelf catheters, basically catheters manufactured by others that may be able to improve peripheral access for our system over the catheter that Baxter had been producing -- had been producing. Basically, the conclusion at this point after testing many catheters is that there's not a single catheter out there that we would say is better than the existing catheter. So although, there are certain situations in certain hospitals, we will recommend the use of another manufacturer's peripheral access catheter, we will also begin developing our own new catheter that we are just now in the kind of the design phase. The catheter that Baxter has been producing has been around for several years. There's a lot of new technology that's been introduced into catheter production, and we'll utilize some of that new technologies in the new design. I would say that it's probably going to be ballpark 6 months before we have our new proprietary catheter available. In the meantime, we will continue to provide tips and tricks to our accounts on how to utilize our existing catheter. We'll also support accounts that want to use another manufacturer's catheter. So the idea from our standpoint is let's get the customer the best possible product we can so that they can have a successful therapy as possible whether that's our catheter or somebody else's catheter. Fortunately, for the company, we make most of the money on the disposable blood circuit. So being able to use another catheter is not costly to us but actually it's in our benefit because we'll utilize more blood circuits with peripheral catheters. Does that make sense?

Absolutely. Do you anticipate that you'll be manufacturing your own catheter 6 months from now or it will be outsourced?

It will be outsourced. The expense of extrusion -- extruders, plastic, the science that's involved in that, we are not catheter specialists. We are console pump and blood circuit specialists. And we can go to outsource that makes catheters all day long, and it'd be much cheaper and much more effective.

Got it. So back to margins, John. So this quarter, Q2, Q3 and maybe a little bit in Q4 be kind of the bottoming out, if you will, and you're still pretty comfortable on the margin expansion upwards of 10% or 20% over the next year or 2?

Yes, this is Claudia, Jeff. It will be into Q1 because we will need to consume the Baxter inventory. So in essence, you can imagine we're doubling up the cost because we're paying for that -- we paid for that inventory from Baxter, and we have our own team internally also manufacturing. So Q4 -- Q1 to be better than Q4 and it should continue to improve from there as volumes go up. And we begin to see the benefits of our own inventory production versus using the Baxter inventory. So I think Q4 is the bottom; maybe Q1, we need to see exactly how that works.

But Jeff, we're very confident that gross margins are going to improve considerably as we produce our own product and put it into inventory. I think we actually will -- I guess, I should be careful here, but I think we'll come up with the standard costs that's actually less than what the Baxter's standard costs was that they started with and then put their markup on it. So I'm feeling really good about our capability in manufacturing this product and improved margins.

Got it. Next question as far as distribution channels where you have one set in the U.K. I believe, you did have already a few installs there prior to the agreement. Are there other territories up for grabs, or other territories that you're looking into, perhaps, Western Europe for some partnerships for some new channels?

We absolutely are doing that. One of the -- again, our goal here is to get back to those customers that have used Aquadex in the past that lost access to it when Baxter basically was closing down that business. We've had customers, users, physicians, hospital systems in Singapore, Germany, France, Italy, Spain that have been in contact with us saying, we'd like to get this therapy back and reengaged and being able to utilize it, how we do that. We basically have to pace ourselves because it's expensive to get out there, get distribution agreements put in place. We're working on that. And I do believe that we will, first and foremost, meet the current needs of customers that have been treating patients that want to continue to treat patients. And then, we'll grow the business from there internationally as those distributors come online. They joined not just to treat existing patients or to provide product to existing customers but to grow their business and thereby grows it for us.

Perfect. Okay. Lastly -- last question, I promise. Could you discuss studies and registries, which you mentioned? What will we see and when within the next 0 to 4 quarters?

Yes. I would expect the registry and the mechanistic study to begin enrolling in the first quarter 2018. We're right now working through the protocols for both of those with our scientific advisory board. They've been hugely helpful, feel much more confident using -- having their clinical input into what those -- the results should be, what the endpoints should be. And we're kind of fine-tuning that now. So I think they will both be initiated in the first quarter.

(Operator Instructions) I'm showing no further questions at this time. So with that said, I'd like to turn the call back over to CEO of CHF Solutions, Mr. John Erb, for any closing remarks.

Thank you, Andrew. I really just want to say thank you very much for joining our third quarter conference call. And I wish you all a really very good day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.