Tactile Systems Technology Inc (TCMD) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2017 Earnings Conference Call for Tactile Medical. (Operator Instructions) Please note that this conference call is being recorded, and that the recording will be available on the company's website for replay shortly.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors Section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission as well as our most recent 10-Q filing.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press conference on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Jerry Mattys, Tactile Medical's Chief Executive Officer. Please go ahead, sir.

Thank you, Emily. Good evening, everyone, and welcome to our Earnings Call for the Second Quarter of 2017. I'm joined on the call this evening by our Chief Financial Officer Lynn Blake.

Let me begin with a brief agenda for today's call. I'll start off with a high-level overview of our financial performance during the first 6 months as well as the second quarter of 2017, along with a discussion of the multiple tailwinds that contributed to our strong revenue performance in the first half of the year. Then, I will outline some of the exciting progress that we made during the second quarter in the development and commercialization of our new Flexitouch Systems.

I'll then turn the call over to Lynn, who will provide you with a detailed review of our quarterly financial results as well as financial guidance for 2017, which we updated in our earnings press release this evening. Following Lynn's review, I'll offer some closing remarks before opening the call for your questions.

With that, let's begin with a review of our most recent financial performance. For the first 6 months of 2017, we reported revenue of $46.1 million, representing growth of 38% over the first 6 months of 2016. Strong sales of our Flexitouch System drove our total revenue growth during the period, offset partially by lower sales of our Entré and ACTitouch products. Sales of Flexitouch Systems increased 46% year-over-year to $41.7 million, while sales of our Entré and ACTitouch system declined by 9% to $4.4 million.

The growth in sales of our Flexitouch Systems during the first 6 months of the year was driven by a continuation of the longer-term growth tailwinds in our business. As we have shared with you in prior earnings calls, these tailwinds have and will continue to represent the primary drivers of our growth in 2017.

Let me now take a minute to briefly review these long-term drivers of our growth. First, we've made considerable investments to expand our sales and reimbursement teams by bringing on a number of new resources. Specifically, over the last 2 years, our selling organizations expanded to more than 145 representatives as of June 30 from 66 representatives at the beginning of 2015.

Second, we've been focused on maximizing the productivity of our selling representatives by providing them with the resources that they need to be successful. As part of our efforts to drive sales force productivity, we continue to focus our reps on targeting clinicians, diagnosing the highest number of lymphedema patients. We began this targeting strategy in 2016 after obtaining reimbursement claims data that enabled us to identify those representing the top 30% of clinicians diagnosing lymphedema in the United States.

Our sales productivity has also been helped by our increased contract coverage with commercial payers as an in-network provider. We began 2017 with contracts as an in-network provider covering over 270 million lives in the U.S. and our sales and reimbursement teams have worked diligently this year to leverage our expanded access to patients who are covered by these insurers.

Moving to a review of our second quarter performance. For the second quarter of 2017, we reported revenue of $26.3 million, representing 33% growth year-over-year. Our revenue performance was due to strong sales of our Flexitouch Systems, which increased by 43% year-over-year to $24.2 million. Sales of our Entré and ACTitouch systems decreased by 28% year-over-year to $2.1 million during the period.

In addition to the longer-term growth tailwinds that I outlined earlier in my remarks our revenue results for the second quarter benefited from notably stronger sales performance in both the VA and commercial insurance segments of our market.

First, in the VA, our performance during the second quarter benefited from our decision in late 2016 to enhance our commercial presence in this portion of the market by hiring several dedicated resources to help our sales representatives penetrate and market more efficiently within the VA hospitals.

Second, within the portion of the market covered by commercial insurers, our success in creating a skilled and tenured reimbursement team, and establishing productive relationships with private payers, has been evidenced in a steady, multiyear improvement in our commercial payer accrual rate. At the end of 2016, our long-run commercial approval rate was in excess of 85%. In the second quarter specifically, we were able to achieve a commercial payer approval rate for our products that exceeded our historical leverage, increasing the efficiency of our sales and reimbursement teams during the quarter.

Lastly, we had a sales compensation plan change that became effective at the beginning of the second quarter. While we were confident in the long-term benefits of the new plan, we were uncertain about the potential near-term impacts as the plan rolled out. We are very pleased to report that the new comp plan had minimal disruption in the business in the second quarter, and more importantly, our sales force is very focused on driving continued growth in our Flexitouch products under the new plan. The increased focus that we saw within our sales force contributed to the sales performance of our ACTitouch and Entré products in the second quarter, and we would expect this trend to continue to impact sales for these products over the balance of the year.

Beyond our strong revenue growth performance in the second quarter, we also delivered 73% gross margins for both the second quarter and year-to-date, as well as a 9% increase in adjusted EBITDA year-over-year to $2.3 million. From an operational standpoint, during the second quarter, we continued to deliver on our stated expectations for the development and commercialization of our pipeline of new product innovation. On May 17, we announced the commercial launch of our Flexitouch System to treat head and neck lymphedema. This is one of the most significant product launches in our company history for 2 reasons: one, Flexitouch is now the first and only pneumatic compression system on the U.S. market that is cleared for the treatment of people with lymphedema of the head and neck in a patient population sorely lacking in treatment options; two, the available data suggests that lymphedema of the head and neck afflicts a significant patient population.

A study conducted by Ragnar et al and published in Lymphatic Research and Biology, estimates that more than 75% of head and neck cancer patients developed lymphedema. The American Cancer Society estimates that there are approximately 400,000 patients in the U.S. with head and neck cancer.

Head and neck lymphedema patients have historically suffered from a lack of available treatment options and we are proud to now offer an at-home therapy that has demonstrated its effectiveness at relieving a variety of lymphedema symptoms. Following our FDA 510(k) clearance of the Flexitouch head and neck system last September, we completed a limited market release involving 80 patients. After a single 32-minute treatment, 88% of these patients saw a reduction in head and neck swelling, and 89% reported improvement in other symptoms, including: an improved ability to swallow, improved range of motion, a reduction in fibrotic tissue, and less discomfort.

While we are excited about the incremental opportunity to treat head and neck lymphedema patients, it's important to note that many of these patients are cared for in areas of the health care system outside of our traditional focus. We are mindful of the potential for this new product to distract our sales force from their primary call points, given the large opportunity that these targeted areas represent.

In the early months of our commercial launch, however, we've been pleased with the ability of our sales force to remain focused on lymphedema clinics and the VA hospitals. With this initial progress in mind, we expect that our Flexitouch System for the treatment of head and neck lymphedema will become a more meaningful contributor to our growth in 2018.

On June 1, we announced the FDA 510(k) clearance of the third generation of our Flexitouch System, the Flexitouch Plus. Flexitouch Plus has been designed to deliver the same clinically proven benefits of our current Flexitouch therapy, while improving the overall patient experience. To this end, the system features several important enhancements. The Flexitouch Plus controller will feature an easy to navigate 7-inch color display. Patients will be able to use the display to create and save preset therapy programs, which can then be initiated at the press of a button. Most importantly, the controller will allow patients to treat 2 limbs simultaneously, enabling them to complete bilateral therapy in approximately half the time. And lastly, we've also redesigned the Flexitouch Plus garments to make them easier for patients to don and off.

Feedback from our existing patient community was the primary source of inspiration for the development of Flexitouch Plus and we're excited to get the product into the hands of our patient customers as part of our limited market release in late 2017 and preparation for our full commercial launch in early 2018.

Lastly, before I conclude my opening remarks, I would like to highlight last month's announcement of our newly appointed Chief Medical Officer Dr. Thomas J. O'Donnell, Jr. (sic) [Dr. Thomas F. O'Donnell, Jr.]. Dr. O'Donnell has led an impressive career in the field of vascular surgery. He is the senior vascular surgeon at Tufts Medical Center and the Benjamin Andrews Emeritus Professor and Chair of Surgery at Tufts University School of Medicine.

Among his many notable accomplishments, Dr. O'Donnell has served as the President of the Society for Vascular Surgery, the American Venus Forum, the New England Society for Vascular Surgery, the Eastern Vascular Society and the Boston Surgical Society. He is a current member of the Editorial Boards for the Journal of Vascular Surgery, Phlebology and Wounds, and has personally produced over 180 articles in peer-reviewed journals.

Dr. O'Donnell also joins Tactile Medical with significant experience as a medical executive, having served for nearly a decade as the President and CEO of Tuft's New England Medical Center Hospitals. Prior to joining Tactile Medical's senior leadership team in July, Dr. O'Donnell was an integral contributor to our efforts as the Chair of our Scientific Advisory Board for the last 4 years, and we look forward to his continued guidance under the expanded leadership as our Chief Medical Officer.

Let me now turn the call over to Lynn Blake, who will review our second quarter financial results in greater detail. Lynn?

Thanks, Jerry. As Jerry said, our revenue growth continued strong in the second quarter. Revenue for the second quarter increased $6.5 million or 33% year-over-year to $26.3 million. This revenue performance was driven by sales of our Flexitouch products, which increased $7.3 million or 43% year-over-year to $24.2 million. The increase in Flexitouch ship -- sales was primarily due to the expansion of our sales force as well as the increased physician and patient awareness of the lymphedema condition and its treatment options.

Flexitouch sales accounted for 92% of our revenue in the second quarter of 2017 compared to 86% of revenue in the second quarter of 2016. The Flexitouch revenue performance in the quarter was slightly offset by a decrease of $781,000 in sales of our Entré and ACTitouch systems, which decreased by 28% year-over-year to $2.1 million. Continuing down the P&L, our gross profit increased by $4.8 million or 33% year-over-year to $19.2 million compared to $14.4 million last year. Our second quarter gross margin rate was approximately flat in comparison with the prior year at 73.2% of revenue compared to 73.0% of revenue in the second quarter of 2016. Second quarter gross margin performance was driven by favorable mix, both product and payer as compared to the second quarter of 2016.

Operating expenses increased by $5.9 million or 47% year-over-year to $18.5 million. The increase in operating expenses was primarily driven by increased sales and marketing expense as well as increased reimbursements, general and administrative expenses. Our sales and marketing expense increased by $3 million or 40% year-over-year, due to continued investment in the expansion of our field sales team as well as increased marketing expense.

Reimbursement, general and administrative expenses increased $2.4 million or 61% year-over-year, primarily due to expenses associated with increased personnel as well as approximately $750,000 of incremental stock-based compensation and $500,000 of public company costs that were not included in operating expense in the second quarter of 2016. Operating income decreased approximately $1.1 million or 59% year-over-year to $730,000 for the second quarter of 2017, compared to operating income of $1.8 million last year. We recorded an income tax benefit of approximately $3 million in the second quarter compared to income tax expense of approximately $800,000 in the prior-year period. The large tax benefit in the current year quarter reflects the impact of discrete items associated with a significant level of tax deductible, stock-based compensation expense generated from equity award-related activity in the quarter.

Adjusted EBITDA increased by $183,000 or 9% year-over-year to $2.3 million compared to adjusted EBITDA of $2.1 million in the second quarter of last year. As a reminder, we've provided a reconciliation of GAAP net income to our adjusted EBITDA in today's earnings press release. Net income for the second quarter was $3.8 million compared to net income of $1 million last year. Net income attributable to common shareholders was $3.8 million or $0.20 per diluted share compared to net income of $177,000 or $0.04 per diluted share last year. Net income attributable to common stockholders in the prior-year period included the accrual of convertible preferred dividends of $509,000 as well as the allocation of undistributed earnings to preferred stockholders of $302,000.

Both of these items were a function of our private company capital structure in the prior year quarter, and thus, neither of these items impacted net income for the second quarter of 2017.

Weighted average shares used to compute diluted earnings per share were $18.8 million and $4.8 million for the second quarters of 2017 and 2016, respectively. As a reminder, the prior-year share count reflects our private company capital structure, and therefore, is not comparable to our current share count.

Let me now turn to a discussion of our 2017 revenue guidance which we updated in our earnings release this afternoon. For the fiscal year ending December 31, 2017, we now expect revenue in the range of $105 million to $107 million, which represents growth of 24% to 27% year-over-year compared to revenue of $84.5 million in 2016. This revised outlook represents an increase of $2 million compared to our prior revenue guidance range of $103 million to $105 million.

As a reminder, our guidance continues to contemplate the impact of 2 notable dynamics: First, the impact of new contract with a large commercial payer, initiated in late March, which includes updated terms and pricing as well as a shift in the mix of sales to patient under rental pricing terms as opposed to upfront purchases; and secondly, we've received a continued potential for some sales force distraction in the second half of 2017 in connection with the commercialization of our Flexitouch head and neck product as well as the limited market release of the Flexitouch Plus.

For full year 2017, we continue to expect total company revenue growth to be driven primarily by continued growth in sales of our Flexitouch products. We expect Flexitouch growth for the year to be approximately 29% to 32% year-over-year. We expect gross margin rate to remain in the low 70s and adjusted EBITDA margin in the high single digits. This includes noncash, stock compensation of approximately $4 million for the year. Consistent with our performance in recent years, we expect to deliver positive GAAP net income again in 2017. For the purpose of calculating earnings per share, we also expect our weighted average share count for the full year 2017 to approximate 19 million shares.

With that, I'll now turn the call back to Jerry for some closing remarks. Jerry?

Thank you, Lynn. Stepping back, our revenue performance in the second quarter and first 6 months of 2017 demonstrates that we're pursuing the correct strategy to deliver strong and sustainable revenue growth, and our updated full year revenue guidance reflects our continued confidence in our outlook for 2017. As we enter the second half of 2017, we remain focused on driving increased productivity in our sales force by continuing to target high diagnosing accounts and by capitalizing on the broad opportunity created by our expanded in-network payer coverage.

We will also continue to build the foundation for future growth by adding new resources to our sales and reimbursement teams, and by working across our organization to ensure the successful commercialization of our new products.

From a market standpoint, our confidence in the growing awareness of lymphedema continues to be supported by a recent analysis of claims data that we commissioned, which showed that more than 1 million patients in the U.S. were diagnosed with lymphedema during the 12 months ending June 30. This represents a greater than 23% increase in the number of lymphedema patients diagnosed over the 12 months ending in December of 2015. This growing awareness gives us confidence about the long-term opportunity for our Flexitouch System.

In conclusion, with expanding and productive selling and reimbursement organizations, and newly commercialized and cleared Flexitouch Systems, Tactile Medical remains committed to raising awareness of the lymphedema condition within the medical community maintaining our U.S. leadership position and delivering advanced and effective therapies to benefit our payers, providers and patients.

Thank you for your participation in today's call and for your continued interest in Tactile Medical. That concludes our prepared remarks for this evening. Operator, we'll now open the call for questions.

(Operator Instructions) And our first question will come from Matthew O'Brien from Piper Jaffray.

Just for starters -- I think, Jerry or Lynn. You talked about the VA contribution, you talked a little bit about these new contracted lives. So if you were to kind of strip out the contribution from those 2 new sources, how is the core business growing? And then, how sustainable are those contributions from the new contracted lives and VA?

Yes, Matt. Thanks very much for the question, and thanks for the compliments on the quarter. The primary drivers for our growth in Q2 were the same drivers that we've been experiencing since we've gone public. So increasing our field headcount, maximizing productivity of that sales organization, targeting those high-diagnosing clinicians, and seeing more contracted lives get benefits as -- with us as an in-network provider as opposed to being out of network. The VA was particularly strong in the first 2 quarters of this year. I think primarily from some of the investments we took on last year, by bringing on some additional skilled resources that know how to navigate that system very well and we expect the VA to be a continuing contributor as we go into the second half of the year. On the commercial payer side, improved approval rate with that -- with those payers is a result of us being in that network with them. And that makes us more efficient when talking to clinicians and their patients. That we can get in-network instead of out of network benefits. So we actually look at both of those to be continuing to drive our performance throughout the rest of this year and well into 2018.

That's very helpful. And then, as the follow-up, it's kind of 2-in-1 here. But just, I know you rolled out the head and neck product. Did we see any contribution here in Q2 from that product? And I guess, how is it going? And then, historically, you've done about 40% of your revenue in the first half of the year, with 60% in the back half. Your guidance assumes 43% in the first half and 57% in the back. So is there anything specifically that you're seeing within the business that's leading you to that type of a range? Is there anything you're signaling here, specifically, that gives you a little bit of caution?

No. I think we have to step back and remember that we started the year and have been trying to guide folks to us being -- thinking of us as a 20-plus-percent grower on the top line. And our initial guidance for the year was 20% to 22% growth. We've now upped that guidance, overall, to 24% to 27% growth year-over-year, with Flexitouch being almost 30% growth year-over-year. So I think it's a strong -- the guidance reflects a very strong Flexitouch growth, we've basically passed along the $2 million beat in the second quarter, and really haven't changed our growth expectations for the second half of the year. So we're feeling very confident about being able to deliver on this new guidance, and think we're in a great place to be able to do that.

And on the head and neck side?

On the head and neck side, we're really early in that launch. You may remember that mid-May was when we actually turned it over to the general field organization, so halfway through the quarter. We've certainly continue to receive very positive feedback about the impact that the new Flexitouch System has for these patients. But from a financial impact perspective, we don't expect it to be a significant contributor in 2017 to our results.

And our second question comes from Margaret Kaczor from William Blair.

So first off, you guys had strong results to start the year. That's clear. But can you give us any additional color into your existing Flexitouch accounts. Is it new high-prescribing physician accounts? Or going deeper into the existing high-prescribing physician accounts? Or are you maybe seeing better stickiness in these new physician accounts than you have in the past?

Margaret, appreciate the question. I would say that overall we are seeing improved performance in all of those segments. So not only from our existing customer base, but high-decile diagnosing clinicians are coming on board, and we're seeing very positive results from them as well. You probably appreciate the fact that we repeated that data pool and were able to access more claims data showing a 23% increase in the number of patients diagnosed with lymphedema in the 1-year period that just ended compared to the one that ended at the end of 2015. So even accelerating the level of awareness that we're seeing in the marketplace. It's causing additional demand for the Flexitouch System. So the increased awareness of lymphedema, the increased awareness of our sales organization, talking to these clinicians and helping them understand the clinical and economic benefits around Flexitouch are really contributing to the overall Flexitouch growth.

I definitely appreciate the additional color there on the over 1 million patients, definitely, impressive there. In terms of a follow-up question. You guys also talked about having your payer approvals be higher than normal. And I know some of it, you answered, Matt, that it was due to being in network. But I assume that should be pretty sustainable from here. And then, was that also something that you had assumed in your guidance? Is it in your guidance for the back half of the year? And just to add one more, because I like asking 5 questions in one question, but as you go out longer term and you improve those payer approval rates, that should be a pretty good thing, I would think, for your profitability profile?

So, yes. There's a number of things in there that I'll try to answer on the better approval rates. We do certainly see some seasonality in that approval rate. And what I mean by that is, our VA business drives up the approval rate because when we get a prescription from the VA, 100% of the time it gets paid for. So the approval rate is very high. So product and payer mix will have an impact on the overall approval rate throughout the year. We tend to see VA being more concentrated in the early part of the year rather than the later part of the year because they're -- the fact that they have no copayment or deductible obligations for the veterans to meet. So yes, we -- it does bode well for our future, and yes, we did build it into the guidance that we've just updated in our press release earlier this afternoon.

Fantastic. And then, if I can squeeze one more in. In terms of your success at the VA, can you give us any numbers, either from that 1 million target that you gave us or otherwise, but what's your penetration into the VA? And how should we look at that penetration whether on year-over-year comps or so on over the next few quarters?

Yes. So VA penetration has 2 elements to it. Penetration within each VA and orders from all of the VAs. While we can't really answer the penetration within each VA, because we really are working to try to find all the sources of where these patients get care within each VA hospital. We can comment that -- we believe we're in about 140 of the 180 VA hospitals now. So we've done a good job of reaching out to those VA's and at least getting our foot in the door. We think there's a lot more potential to go deeper in each of those 140, yet alone find the final 40, as customers for Tactile Medical.

(Operator Instructions) Your next question comes from Jason Mills from Canaccord Genuity.

This is actually Cecilia Furlong on for Jason. And I was just wondering, could you provide a bit more color just around the impact to date from the large payer you called out shifting to rentals? And should we think of Q2 as a proxy for future quarters, and do you expect additional providers could ultimately pursue a similar strategy?

So we did -- Cecilia, good to hear your question. We did, in fact, report at our last conference call that one of the major payers had just signed a contract with us, late in March, as well as moved to more of a rental model than a purchase model. And that actually has happened, it has opened up that payer. And actually, it has opened up their patients. Patients that are insured by that payer, such that we've seen a pretty significant increase in the number of patients that we were able to serve and are able to serve from that particular payer. As you may remember, because we're providing this as a rental, we're not recognizing the full sale amount in the first time we bill that patient; rather, we divide it into the rental period. So that can have an impact on our revenue recognition over time. But so far, that payer's business has actually increased not decreased for us in the second quarter. And we're optimistic we can continue to grow that business going forward. To your question on do we expect other payers to go to this model? The answer is no, we don't. We've certainly had other payers who have done rentals in our past. I'll have Lynn comment a little bit on the percent of our revenue that comes from rental of our product. But we haven't seen a shift toward rental of our Flexitouch Systems other than the one payer we signed a contract with. So Lynn?

Sure, Jerry. To that point, currently, rent -- our rental business is approximately a mid-teens percentage of our total business. And historically, it's been in the 10% to low teens percent, say, a year ago. So while this particular contract did move that percentage of total volume up more towards rental, it's not a sea change in the trend for us.

Okay. Great. And then, if I could just have one follow-up. Just wondering, could you provide a little more -- or just an update on your plans for sales force additions through the back half of the year? And what type of increase you're interested in getting over 2016 levels?

Yes. Be happy to do that. So we set out this year to add 20% to our field organization and coming through the first half of this year, we are right on our plan to do that. So we do expect to continue to hire throughout the year. In fact, we just brought on an additional recruiting resource to help us actually attract and get candidates to interview. But we are on our plan to increase the sales organization by 20% this year.

That does conclude our conference for today. Thank you for your participation.