Tactile Systems Technology Inc (TCMD) 2019 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth quarter of 2019 earnings conference call for Tactile Medical. (Operator Instructions) Please note that this conference call is being recorded and 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 annual report on Form 10-K filed today with the Securities and Exchange Commission. 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 the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release 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, operator. Good afternoon, and welcome, everyone, to our fourth quarter and full year 2019 earnings call. I'm joined on the call today by our Chief Financial Officer, Brent Moen.

Let me provide you with a brief outline of today's call. I'll start with a review of our financial performance highlights for the full year 2019, during which I'll also discuss the primary drivers of our revenue performance. Following this discussion, I'll review our 2019 operating highlights and briefly summarize our sales performance during the fourth quarter. Brent will discuss our financial results in detail and review our financial guidance for 2020, which we updated in our earnings press release this afternoon. Then share a few closing thoughts on our outlook in 2020 before we open the call for questions.

2019 was another year of excellent performance for Tactile Medical. For the full year, we achieved revenue of $189.5 million, representing 32% growth year-over-year, coming in ahead of our guidance range for 2019, which we increased on our third quarter earnings call. 2019 revenue growth was primarily driven by sales of our Flexitouch Plus system, which increased 30% year-over-year to $171.3 million. Sales of our Entré systems were also an important contributor to our total company revenue growth in 2019, increasing 54% year-over-year to $18.2 million. As a reminder, our revenue results in 2019 were impacted favorably by the adoption of the new lease accounting standard, ASC 842, which Brent will discuss in detail during his remarks. Excluding the impact of ASC 842, our revenue increased 28% year-over-year on an operational basis in 2019.

Our revenue growth in 2019 benefited from several important drivers that we have shared with you on prior earnings calls. First and foremost, the expansion of our sales team was a strong contributor to our success in 2019. By year-end, we managed to exceed our hiring goal for the year, ending 2019 with more than 240 reps compared to more than 200 reps at the end of 2018. Our pace of hiring in 2019 is evident of the improvements we've made in our process for recruiting, hiring and onboarding new talent, and we expect these additions will continue to fuel our growth moving forward.

Second, the strong market adoption of our Flexitouch Plus system, which we launched in the second quarter of 2018. We continue to receive feedback from prescribers and customers that our third generation Flexitouch System, with its improved garments and controller and strong clinical evidence, is the best pneumatic compression device on the market. Its ability to treat 2 legs simultaneously has led to increased adoption from new clinicians as well as existing clinical customers who were previously prescribing competing devices for bilateral therapy.

Third, our targeting strategy to focus our sales reps on the highest diagnosing accounts in our market. During 2019, we were successful in expanding our penetration of these target accounts, and we continue to see a lot of greenfield opportunity with respect to this targeting strategy, as I will discuss in -- later in my remarks.

And lastly, our broad in-network coverage with commercial payers. We began 2019 as an in-network provider for over 275 million U.S. lives, or approximately 90% of the insured population, allowing us to provide our systems to patients covered under commercial insurance plan at a lower out-of-pocket cost. We complemented our strong 2019 sales performance with gross margins of 71%, consistent with our 2019 target of gross margin in the low 70s, and improvements in our profitability profile, including a 210 basis point improvement in adjusted operating margins year-over-year, and adjusted EBITDA of $25.3 million up 46% year-over-year.

Turning to an overview of our operational performance in 2019. In addition to our Flexitouch Plus system, during 2019, we continued to experience demand for Flexitouch Head and Neck from customers in lymphedema clinics and the VA, where our sales team is focused on selling this product. Sales of Flexitouch Head and Neck increased nicely and remain in the low to mid-single digits as a percentage of our total revenue in 2019, consistent with our expectations. At the same time, we focused on building our portfolio of clinical evidence with the goal of completing and submitting 3 clinical publications in 2019 in order to support our pursuit of expanded reimbursement coverage and widespread adoption of Flexitouch Head and Neck. We published a clinical study of Flexitouch Head and Neck in the journal, Otolaryngology-Head and Neck Surgery and completed manuscripts for 2 additional studies, which we expect will be published in the first half of 2020.

With respect to the newest addition to our product offering, the Airwear compression garment, in 2019, we focused on securing our supply chain in preparation for our limited launch, which I'm pleased to announce we began in the fourth quarter. We acquired this product in part because of customer and clinician feedback, identifying the need for a static compression garment that's easy to put on and comfortable to wear. We found Airwear to be the best static compression garment on the market and the feedback that we've received from customers and clinicians has reinforced this view. By creating a more comprehensive product offering for lymphedema management, we also see an opportunity to establish relationships with patients early in their treatment of lymphedema.

As lymphedema is chronic and progressive, patients that are currently using static compression garments may ultimately transition to the use of a pneumatic compression device. And our goal is for Tactile Medical to be considered a familiar and trusted brand able to meet all of their therapy needs. While in the early innings of our full launch, feedback from patients and clinicians confirm the appeal of our Airwear product. We intend to use the insights from our limited release to fully leverage our ability to help patients earlier in their treatment cycle and also drive pull-through of our Flexitouch systems when appropriate.

We also expanded our efforts in 2019 to raise awareness of lymphedema and our treatment solutions through the development of new medical education programming and clinical publications. First, we increased our educational programs by more than 60% compared to the prior year. Our programming in 2019 included a variety of events focused on educating clinicians within the medical community, such as vascular and head and neck specialists, that are likely to be involved in the diagnosis and treatment of lymphedema. We also continued to support the development and publication of new research to improve the medical community's understanding of lymphedema, including its comorbidities and prevalence, as an underdiagnosed and undertreated condition.

On our Q3 earnings call, we announced the publication of a new study in the September 2019 issue of the Journal of Vascular Surgery: Venous and Lymphatic Disorders, titled lymphedema-associated comorbidities and treatment gap. This study included de-identified data from nearly 27,000 patients with lymphedema and was the largest study to date, detailing the comorbidities associated with lymphedema and the lymphedema treatment reach within each comorbidity according to its researchers. It identified notable treatment gaps for lymphedema patients with specific comorbidities, such as venous leg ulcers, helping to advance the medical community's understanding of such treatment gaps.

This month, we also announced the e-publication of a study in the Journal of Vascular Surgery: Venous and Lymphatic Disorders, which highlights the large underdiagnosed and underserved population living with chronic venous insufficiency, or CVI-related lymphedema, also known as phlebolymphedema. This study, titled the clinical characteristics of lower extremity lymphedema in 440 patients, was a 3-year single-center retrospective study that documented the prevalence and manifestations of the 4 most commonly encountered causes of lower extremity lymphedema patients, who presented to an oncology-affiliated physical therapy lymphedema center. Researchers found that CVI was the most common cause of lymphedema, responsible for 41.8% of lower extremity lymphedema cases.

While cancer has historically been considered to be the most common cause of lower extremity lymphedema, the findings of this study highlight the potential large population of patients with phlebolymphedema and the need for further research and increased awareness of this condition. Importantly, the researchers of this study suggested that the prevalence of phlebolymphedema is approximately 16 million in the U.S. alone, citing prior literature estimating that 5% of the population has some skin changes associated with CVI. This implies that the estimated prevalence of lymphedema in the U.S. is considerably larger than previous estimates of 5 million and highlights the need for increased awareness across the medical community to address this much larger, underdiagnosed and underserved patient population.

Moving to a brief review of our financial performance in the fourth quarter. We were pleased to bring the year to a strong close with fourth quarter revenue of $57.1 million, representing 23% growth year-over-year. Q4 revenue was due primarily to sales of our Flexitouch Systems, which grew 21% year-over-year to $51.6 million, coupled with contributions from sales of our Entré systems, which grew 48% year-over-year to $5.5 million. Like the primary drivers of our 2019 sales performance, our growth in the fourth quarter benefited from strong sales to commercial and Medicare patients.

As a reminder, during the fourth quarter, our sales force tends to focus their efforts heavily on patients covered on commercial insurance plans that have met their annual deductibles, which reduces the out-of-pocket cost of our system. In the fourth quarter, sales of our Entré products continued to benefit from our strategic shift to transitioning order processing from our field team to our internal team of specialists, which allows our field sales representatives time to focus on driving sales of our Flexitouch system. We have seen tangible improvements in productivity as a result of this strategy, and we plan on identifying additional ways to enhance the productivity of our sales force this year.

Let me now turn the call over to Brent to discuss our fourth quarter financial results in greater detail and review our 2020 guidance, which we updated in our press release this afternoon. Brent?

Thanks, Jerry. Total revenue in the fourth quarter increased 23% to $57.1 million compared to $46.4 million in the fourth quarter of 2018. Our total revenue performance in the quarter was driven by an increase of $8.8 million, or 21% year-over-year, in sales and rentals of our Flexitouch systems and an increase of $1.8 million, or 48% year-over-year, in sales and rentals of our Entré systems. The increase in our Flexitouch revenue was largely driven by the expansion of our sales force, increased physician and patient awareness of the treatment options for lymphedema, broad in-network coverage with insurance payers and growth in the number of Medicare patients served. The growth in sales of our Entré product benefited from the strategic shift to manage these orders in-house, as Jerry discussed earlier.

Sales and rentals of our Flexitouch systems accounted for 90% of our total revenue in the fourth quarter of 2019 compared to 92% in the prior year. Fourth quarter revenue by payer was 75% commercial, 13% VA and 12% Medicare compared to 70%, 18% and 12%, respectively, last year. As discussed on our earnings calls throughout 2019, we adopted the new lease accounting standard, ASC 842, which became effective on January 1, 2019. The adoption of ASC 842 did not require us to restate any of our prior periods. The impact of the company's adoption of ASC 842 was not material to the year-over-year increase in total revenue in the fourth quarter of 2019.

Turning to the rest of the P&L. Fourth quarter gross profit increased $9.1 million, or 28%, to $41.4 million compared to $32 million last year. Gross margin was 72% of sales in the fourth quarter of 2019 compared to 69% of sales in the fourth quarter of 2018. The increase in gross margin was primarily attributable to revenue mix by product and payer compared to last year as well as a $700,000 noncash inventory write-off related to our Actitouch assets recorded in the fourth quarter of 2018, which did not impact our gross margins in the fourth quarter of 2019.

Fourth quarter operating expenses increased $5.2 million, or 17%, to $35.1 million compared to $29.9 million last year. The increase in operating expenses in the fourth quarter was primarily driven by a year-over-year increase of $4.6 million, or 26%, in sales and marketing expenses due to the continued investments in the field sales team and marketing initiatives to increase clinician awareness. The increase in operating expenses was also impacted by higher reimbursement, general and administrative expenses, which increased $700,000, or 6%, to $11.5 million compared to $10.8 million last year. This increase was primarily due to personnel-related expenses, resulting from the additional headcount in our reimbursement operations, payer relations, patient services and corporate functions.

Also, the change in year-over-year reimbursement, general and administrative expenses were impacted by 2 nonoperating items. Q4 2019 results included a onetime charge of $1.1 million related to the lease termination of our former corporate headquarters and our Q4 2018 results included an intangible asset impairment charge of $1.8 million related to our Actitouch assets. Excluding these 2 nonoperating items, our fourth quarter reimbursement and G&A expenses increased 15% year-over-year to $10.3 million.

Operating income for the fourth quarter of 2019 increased $3.9 million, or 183%, to $6 million compared to operating income of $2.1 million last year. Excluding the $1.1 million onetime lease termination charge and the $2.5 million noncash Actitouch inventory write-off and impairment charge in the fourth quarters of 2019 and 2018, respectively, non-GAAP adjusted operating income increased $2.5 million, or 54% year-over-year, to $7.2 million in the fourth quarter of 2019 compared to $4.7 million in the fourth quarter of 2018.

We recorded an income tax expense of $1.9 million for the fourth quarter of 2019 compared to an income tax benefit of $84,000 last year. The tax expense recognized in the fourth quarter of 2019 was primarily related to decreased tax deductible share-based compensation compared to the prior year.

Net income for the fourth quarter of 2019 increased $1.9 million, or 82%, to $4.3 million or $0.22 per diluted share compared to net income of $2.4 million or $0.12 per diluted share for the fourth quarter of 2018. Weighted average shares used to compute diluted net income per share were 19.7 million and 19.5 million for the fourth quarters of 2019 and 2018, respectively.

Fourth quarter adjusted EBITDA increased $2.1 million, or 26%, to $10.4 million compared to adjusted EBITDA of $8.3 million in the fourth quarter of 2018. Our adjusted EBITDA margin was 18.3% in the fourth quarter of 2019 compared to 17.9% in the fourth quarter of last year. As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

Turning to a brief review of our results for the full year 2019. Total revenue increased $45.7 million, or 32%, to $189.5 million compared to $143.8 million for the full year 2018. In the full year 2019, the adoption of ASC 842 benefited our total revenue growth by 3.7 percentage points. The increase in total revenue was driven by an increase of approximately $39.4 million, or 30% year-over-year, in sales and rentals of the Flexitouch system and an increase of $6.4 million, or 54%, in sales and rentals of the Entré system. 2019 revenue by payer was 72% commercial, 17% VA, 11% Medicare compared to 71%, 20% and 9%, respectively, last year.

Net income for 2019 increased $4.3 million, or 66%, to $11 million or $0.56 per diluted share compared to net income of $6.6 million or $0.34 per diluted share for the full year 2018. Weighted average shares used to compute diluted net income per share were 19.6 million and 19.3 million for the full years 2019 and 2018, respectively.

Adjusted EBITDA for 2019 increased $8 million, or 46%, to $25.3 million compared to adjusted EBITDA of $17.3 million for the full year 2018. Adjusted EBITDA margin for 2019 increased 130 basis points to 13.3% compared to 12% for 2018.

At December 31, 2019, cash, cash equivalents and marketable securities were $45.2 million compared to $45.9 million at December 31, 2018. The company had no outstanding borrowings on its $10 million revolving credit facility at year-end.

Let me now turn to a review of our 2020 guidance, which we updated in our earnings release this afternoon. For 2020, we expect total revenue in the range of $227.5 million to $230.5 million, which represents growth of 20% to 22% year-over-year compared to revenue of $189.5 million in 2019. Our 2020 total revenue guidance assumes that the adoption of ASC 842 will be a headwind to our full year revenue. As a reminder, our full year 2019 revenue included approximately $5 million of rental revenue related to rental agreements commencing prior to December 31, 2018, which were recognized as month-to-month operating leases in 2019 and will not contribute to the company's revenue results going forward.

Excluding the $5 million contribution to full year 2019 revenue, the 2020 revenue range reflects year-over-year growth of approximately 23% to 25% on an operational basis. We have included a reconciliation table detailing the projected 2020 GAAP revenue growth rate to the projected 2020 non-GAAP revenue growth rate in our earnings press release this afternoon. By product, our 2020 total revenue guidance range assumes sales of our Flexitouch products increased approximately 20% to 21% year-over-year in 2020 and sales of our other products, specifically Entré and Airwear, increased approximately 24% to 27% year-over-year in 2020.

In terms of the anticipated contribution of our new products, we expect head and neck sales in the low to mid-single digits as a percentage of total revenue, and we expect sales of Airwear to be immaterial in 2020.

Turning to the P&L. For the full year 2020, we expect our gross margin to be in the low 70% range and our adjusted EBITDA margin to be in the range of 14% to 15%. This adjusted EBITDA range assumes stock-based compensation expense of approximately $12 million. For the purpose of calculating earnings per share, we expect our fully diluted weighted average share count in 2020 to be approximately 20 million shares.

Finally, I'd like to remind investors that our business experiences significant quarterly seasonality each year as we move into the new year with Q1 and Q4 representing our smallest and largest revenue volume quarters, respectively, each year. Over the last 3 years, our first quarter revenues have ranged from approximately 18% to 19% of total annual revenue on a normalized basis. For Q1 2020, we would expect revenue to be at the higher end of the historical range of full year revenues or approximately 19% of full year 2020 sales. Notably, the first quarter of 2019 includes approximately $2.8 million of benefit from our adoption of ASC 842.

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

Thank you, Brent. In summary, we're excited by the achievements we have made this past year. And in 2020, we look forward to continuing to drive commercial execution, operational progress and increased awareness of our technologies in the market. Our 2020 guidance reaffirms our commitment to delivering 20% plus revenue growth and improvements in our profitability, the long-term goals we have executed against since our initial public offering in 2016. We continue to see compelling evidence as we did back then that we are focused on a market that is both vastly underpenetrated and expanding at an impressive rate.

In December of 2019, we conducted another analysis of U.S. medical claims data, which showed that there were 1.3 million patients diagnosed with lymphedema in the 12-month period ending June 30, 2019, an increase of 18% in 1 year. This updated analysis suggests that the annual number of patients diagnosed has grown at a compounded annual growth rate of 12% over the last 5.5 years compared to the 700,000 patients diagnosed in the 12-month period ending December 31, 2013, which was the first period of data we evaluated. Importantly, the 1.3 million patients diagnosed represents a $5 billion plus addressable U.S. market opportunity, one that we believe remains very underpenetrated with only 40,000 Flexitouch systems shipped during 2019.

In 2020, we will continue to capitalize on this vast opportunity by focusing on the primary drivers that have fueled our rapid growth in recent years. We will leverage our recent sales force hires and continue to expand our sales team headcount, with the addition of approximately 20 new sales representatives with the goal of hiring the majority of these reps in the first half of 2020. We will continue to enhance the productivity of our sales reps by increasing our coverage and penetration of the high-diagnosing accounts in our market. The medical claims data that we pulled in December of 2019 reflects 2 encouraging themes that give us confidence in this strategy.

Recall that based on our prior claims data pull in December of 2018, we estimated we were doing business with at least 1 clinician in nearly 50% of the more than 4,700 high-diagnosing facilities in the United States. Based on the 2019 data, we now estimate we are doing business with more than 60% of these high-diagnosing facilities. Similar to our prior data analyses, our recent medical claims data continues to point to notably strong growth in the number of high-diagnosing facilities in the U.S. This trend is encouraging as we believe it reflects the growing awareness of lymphedema among clinicians and represents an expansion in the number of potential customers to enhance our commercial targeting efforts.

Our efforts in moving the ordering responsibility for Entré to our internal team will accelerate in 2020, freeing up time for our reps to focus on serving Flexitouch patients. And lastly, we'll continue to benefit from our broad in-network coverage with commercial payers.

Before I conclude my remarks today, I'd like to briefly discuss news that we announced since the end of the year. First, the judge overseeing the lawsuit that was filed by a competitor last January chose to allow the suit to proceed. While we would have preferred to see the suit dismissed, we look forward to the opportunity to defend ourself against these frivolous allegations. Still believe strongly that we will prevail in this case.

The other news we announced last month was that I announced my intention to retire in 2020. It's truly been my pleasure to lead Tactile Medical for 15 years and witness our accomplishments during this time for the benefit of our patients, customers and shareholders. I have great confidence that our Board of Directors will find an inspirational leader to continue our strong trajectory and look forward to continuing in my role until my successor is identified and then work with him or her to ensure a smooth transition.

I'm also proud to say that Tactile Medical is extremely well positioned for future success. The markets that we are serving are growing. Evidence of the superiority of our products is growing, and the awareness of the consequences of untreated lymphedema is growing. Importantly, we have a strong senior management team with a demonstrated ability to execute, tenured sales, reimbursement and operations personnel, and a time-tested growth strategy to further capitalize on these market dynamics.

I'd like to close by congratulating the Tactile Medical team on a job well done in 2019 and expressing my thanks to our patients, clinicians, payers, shareholders and those on this afternoon's call for their interest and support.

Operator, we will now open the call for questions.

And our first question comes from Margaret Kaczor with William Blair.

So maybe the first one for me is on guidance. So if we exclude some of the ASC 842 impacts, it looks like that's coming in, in the mid-20% range, which frankly, it's stronger than you guys have typically guided to at this point of the year. So I understand the sales or productivity improvements and so on that could drive that growth. But is that the main delta? Or is there something else you're seeing in the field that gives you greater confidence?

Margaret, thanks for the question. We certainly like and believe that increasing the headcount in the field is a key driver of growth in 2020. I would say the productivity that we're seeing by both leveraging the in-house scheme to process those Entré and Medicare orders to free up product specialists' time is working very, very well. And this targeting strategy, which we've been talking about now for a couple of years, is really starting to pay off, and you can see that in the data that I shared a little earlier. So I think our success in penetrating these important accounts, where we've gone from nearly half penetrated at the beginning of 2019 to now more than 60% penetrated at the end of the year, speaks well to why we are bullish about 2020 guidance.

Okay. So that's helpful. And then that brings me kind of to the follow-up question, which has to do with kind of the high-diagnosing clinicians as well as the updates on TAM, both of which were very good. So the first part of the question is on the high-diagnosing accounts as the market growth is already high teens, these accounts are growing faster than that, which means that you guys get the benefit from that dynamic. But in terms of the growth drivers, how do we think about that helping that productivity and profitability for you guys? And then kind of the side question on TAM is that CVI-related lymphedema trial at 16 million patients is quite large. So what are the next moves that you guys need to make strategically to see a more material impact on numbers from that?

Great. Thanks. Good couple of questions. On the first one, the new data, when we are able to convert one of these high-diagnosing clinicians to begin prescribing our Flexitouch system, they tend to order twice the amount of product as our average account. So this has been a very fruitful way to focus the sales team and get them to utilize -- better utilize the time that they have. So the new data suggests growth in the number of patients diagnosed, the number of high-diagnosing clinicians, the number of clinics, and most importantly, the number that we've penetrated. So I think those are all very positive elements going into 2020.

The second question was around that -- the fact that CVI-induced lymphedema or phlebolymphedema was -- has traditionally not been thought of as the primary cause of lower extremity lymphedema. Our activities and our focus over the past 1.5 years to 2 years has been on trying to reach the vascular physician. That vascular doc is the one who sees these patients with chronic venous insufficiency. So we're focused on them now. And this just gives us more evidence to go into those accounts and help them see the lymphedema that they're seeing in these patients every day.

Do you think the data is compelling enough to try to drive adoption? And is this specific data set just one of many? Or do you find it to be kind of a capitulating point potentially for growth?

I think it's a nice inflection point for teeing up the awareness of lymphedema in this population of patients with poor circulation. So I would say that most vascular physicians don't look for lymphedema today. And with this evidence now, we can go in and convince them that they're missing it and that they have an opportunity to really be more aware of the problem and of our solution for this patient. So we're very excited about those new prevalence data.

Our next question comes from Chris Pasquale with Guggenheim.

Jerry, you guys added about 40 reps in each of the past 2 years, and it seems like there's still plenty of runway to expand your footprint if you're only calling on 60% of your potential customers. So what's the thought process behind dialing that back to 20 this year?

Chris, thanks for the question. So we actually set out to hire 30 more reps in 2019 and ended up finding 10 more through our recruiting efforts and decided to bring them on ahead of time. So we've been saying about 30 a year is kind of the -- what we'd like to be able to continue to drive forward. So that 10 plus the 20 we just mentioned in the call today gets us to that 30 number. That's how we've been thinking about it.

Okay. So you pulled forward some of the hiring from '20 into the back half of '19, essentially?

Into that last fourth quarter, actually, yes.

Yes. And then my second question. So it looks like VA sales declined about 9% in the quarter. Could you talk a little bit about what you're seeing there? How much of that weakness is related to disruption from the qui tam suit? And with the suit now looking like it's going to take a little while to resolve, how are you thinking about that segment of the business in 2020?

Yes. Good question. So sales to the VA in the fourth quarter were about $7.6 million of the $57.1 million we had in the quarter. So roughly about 13% of our sales. We did see a decline driven by underperformance in really just one of the regions of the company, which offset better results around the rest of the country. There is no doubt the qui tam lawsuit has impacted results again in the fourth quarter. But we had strong growth outside of those areas that weren't anywhere near the -- where this was filed. So that's what has us optimistic about sales going into 2020.

We don't really forecast or we don't really model by payer because we have shown the ability of our sales organization to pivot to the most -- to the sales that are available in their specific territory, but we've experienced some really nice performance in the VA outside of that one region. So from a growth perspective, we're starting to lap that headwind, which started, unfortunately, at this time last year. And I would say one of the things that we're most excited about is we actually saw a new set of data presented in November at the VEF Conference in New York, which was the first VA-specific data, showing very compelling results for this veteran population. So we're now able to arm our 240 reps with new data that they can go back into the VA and make the case as to why Flexitouch is the right answer for this veteran. And I think that's going to get it back on a little bit more of a growth trajectory than what we saw in the fourth quarter.

Chris, it's Brent too. Just to kind of recap what happened also in Q4 of 2018. So if you recall, in 2018, last -- since September on, we got our Flexitouch Plus system on the federal supply schedule. So it really drove what I'd consider to be higher-than-anticipated growth in the quarter of 2018. So the comp comparison, Q4 '18, Q4 '19 was a little distorted. And certainly, we don't believe that one quarter drives a trend in terms of where we think the opportunity lies in the VA.

Our next question comes from Ryan Zimmerman with BTIG.

So just to start, Jerry and Brent, Airwear will be immaterial this year. But if you could just talk about the recurring revenue opportunity for Airwear as you think about it maybe in outer years. And what type of gross margin impact would Airwear potentially present for the company, good or bad, to consider? And then I have a follow-up on head and neck?

Ryan. I appreciate the question, and happy to answer specific to Airwear. So as you may remember, we have a very limited launch going on in 2019, with very positive feedback from both clinicians and patients who used it during that time. We're on our way to a full commercial launch. But I think the thing that makes us most excited about this product is the fact that we get access to the patient earlier in their treatment cycle. And once we have patient access, we can begin educating them on what some of their other treatment options are, including our Flexitouch system.

So it is true that these patients can get reimbursed for this product on about an every 6-month basis and this would represent, what I would say, our first opportunity for some consumable-type sales. It is a low-average selling price. So we don't want to distract the sales organization too far off of their call point when they're -- when they have an opportunity to sell a Flexitouch, but because of its recurring nature, we're excited about what this can do for the company. We've said it's kind of immaterial for 2020 because we think it's going to take a while to catch on, but think it will be more meaningful as a contributor once we roll into 2021.

Ryan, it's Brent. So from a gross margin perspective, Airwear is precisely the same ZIP code as our overall corporate gross margin. So don't anticipate that there's going to be any significant impact on gross margin as we roll out Airwear in 2020 and beyond.

Okay. And then just my follow-up question. Head and neck, you guys called out as kind of being in the same -- similar percentage of sales this year as it was last year. So applying growing in line with where the rest of the business is growing. But given the opportunity, you focused on clinical data, you have some more publications coming out in the first half of this year. What is it that inflects your adoption in head and neck higher in your view as we move into the back half of 2020 and then into '21?

Yes, really good question. So you've summed up well that our current focus is on building the portfolio of clinical evidence to not only drive more widespread adoption of Flexitouch Head and Neck, but also give us the opportunity to go gain expanded reimbursement coverage. You may remember that today we're only billing for the controller and we're not billing for the garments. That -- we will certainly see our way to changing that and why we are so focused on publishing clinical evidence to allow us to approach CMS and ask for unique codes for those head and neck garments. We believe that will be a inflection point for the company's ability to convince more clinicians that this ought to be the product that they're thinking about for their patients with head and neck lymphedema.

So we published one study in the Journal of Otolaryngology-Head and Neck Surgery. We've got 2 more manuscripts that have been submitted, and we are doing additional clinical study development. So we believe we'll be very well positioned to go ask for those codes yet this year. So in 2020, we'll ask CMS, they usually opine on these in the first quarter of the following year. So 2021, we should gain our coding decision. At which point, we then go out and get the opportunity to work on coverage policies with payers across the country while those codes are becoming effective, and they would become effective in January of 2022. So that's the cadence that we see for the head and neck product.

Our next question comes from Matt O'Brien with Piper Jaffray.

Just to follow-up a little bit, a few questions asked earlier. Jerry, should we expect head and neck or the new expanded indication target market that you talked about today to impact the business first? And what kind of timing are you thinking? Are you thinking head and neck next year and then the expanded patient population maybe more like '22?

So I think we will see continuing growth out of the head and neck product through this year and through 2021. But I think what Ryan was getting at is when is the inflection point, and we see that as 2022, Matt. So I think once we have coding in place, coverage in place, that's when clinician adoption should really accelerate. And this is a large unserved market opportunity because these patients with head and neck lymphedema really don't have any other options to treat this condition. So we think we're in a great place. We just want to make sure we get the evidence behind us before we push down too far on the accelerator.

Okay. And then the new indication would probably be sometime after that, is that fair?

New indication for what, Matt? Just clarify.

Extra 15 million patients that you're citing today?

Oh, yes. So that actually is a current indication for the product. Our product is already cleared to market to treat chronic venous insufficiency and specifically, with -- especially with those patients that have venous ulcers. So we don't have to seek additional clearance to be able to serve that market.

Yes, I'm sorry. I don't think I spoke appropriately here. I'm clipping between calls a little bit. So this script you talked about was, I think, you have clinical data that's associated with it. And I think it's a new opportunity to kind of go after newer patients that expands your (inaudible). Is the thought that you are going to go after that group sometime -- is it now, is it '21, '22? How do we think about that? How meaningful?

Yes, we think it's really meaningful and it's one of the reasons that we're more bullish on our 2020 guidance than we've been historically. We are calling on the vascular community today. And they are the ones who see the CVI-induced lymphedema or phlebolymphedema. So we expect this will drive sales yet in 2020. And why we're so bullish on our performance this year.

Got it. That's helpful. And then as a follow-up here. If I look back to 2018 and I think a lot of people are really worried -- thinking about the productivity per rep, which, Jerry, you're kind of talking about here. But 2018, you increased productivity per rep about $65,000 per rep. You need to do about the same thing this year that $65,000 per rep to get to your guidance. So is it bilateral that's going to lead the charge there? Is it this CVI group? A combination? How do we just get really comfortable that with all these new reps maybe disrupting some territories that you can drive that level of productivity from a product perspective?

Yes. I think it's a really good question. So we see probably the biggest driver of productivity being able to take the burden of some of the paperwork from our field team to an internal group. So we began that process about 18 months ago with a pilot that tried to get the internal team processing orders for Entré, and most of those go to the Medicare patient population because of Medicare's requirement that a patient has a trial of a simple device before moving up to a Flexitouch. So we started it then. It accelerated in 2019, and it's one of our key initiatives for 2020 growth is to leverage this in-house team to process these orders and free up the product specialists so they can go sell Flexitouch. You'll remember that Flexitouch has basically a 3 to 4x increase in the average selling price compared to an Entré. So the more we can free up their time to go sell that, the better served that we are.

(Operator Instructions) Our next question comes from Jason Mills with Canaccord.

It's [John Young], on for Jason. My first is, can you give us an update on your international initiatives, both from a commercial infrastructure standpoint as well as markets you believe are most credible for Flexitouch in the medium term? When could OUS sales be material contributor to growth in the overall business?

Yes. You bet, [John]. Thanks, and welcome to the call. We continue to pursue our international opportunities. We do not expect a commercial contribution in 2020 though. You may remember, we had our product approved for the CE Mark before Europe changed their medical device directive, and we have just completed our quality system audit to that new standard. We expect to get the results from that audit back here in the next 90 to 120 days, at which point we'll react to whatever they say, and we expect that by the end of the year, we'll be able to put the CE mark on our products for sale in Europe. Europe is going to be the initial focus for us going forward. But again, end of 2020 for the ability and revenue not really likely this year at all, we expect that to begin sometime in 2021.

Great. And then for my follow-up. As you go forward beyond 2020, how do you think about rep productivity in the head and neck opportunity? And potential additional resources, do you look to add to really tap into this opportunity?

Thank you, [John]. We are still of the belief that we can put 320 to 350 reps into the field and have them be productive. This is a growth opportunity. So we are continuing to invest heavily in sales and marketing. We do expect leverage from some of our other areas on the P&L, but not really from the sales and marketing line because we're really focused on growth there. We'll get -- we will get productivity enhancements, as I mentioned to the last question, but our focus is really on expanding the sales organization and continuing to reduce the size of the territories that our reps cover, which we think makes them more productive and, frankly, better at their job.

Thank you. And that does conclude our conference for today. Thank you all for your participation.