Nuwellis, Inc. (NUWE) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the CHF Solutions Earnings Conference Call for the second quarter ended June 30, 2019. [Operator Instructions] Participants of this call are advised that 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 call over to Scott Gordon, Managing Director of CORE IR the company's Investor Relations firm. Sir, please go ahead.

Thank you, Justin and thank you for joining today's conference call to discuss CHF Solutions corporate developments and financial results for the second quarter ended June 30, 2019. With us today are John Erb, the company's CEO and Chairman of the Board; Claudia Drayton, the company's CFO and Nestor Jaramillo, the company's Chief Commercial Officer. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended June 30, 2019. If you have 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 be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully, 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 or Cautionary Statements Related to Forward-Looking Statements. For an 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 the discussions 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 second quarter 2019 earnings call corporate update. Our vision is to become the global market leader in fluid management with solutions that change the lives of patients suffering from fluid overload. CHF Solutions continues to be at the forefront of fluid management in heart failure patients when diuretics have failed. During the call, I will highlight the progress we have made in Q2 in executing on our vision. I will provide an update on the following topics; one, revenue growth; two, new hospital accounts opened in Q2 and expected accounts to be opened in Q3; three, cardiovascular surgery update; four pediatric strategy update and finally number five, update on clinical studies. Today the most important metric demonstrating successful execution is revenue growth. Second quarter revenue was 1.7 million a 53% increase in year-over-year revenue versus Q2 2018, representing nine consecutive quarters of year-over-year double digit growth since we acquired the Aquadex technology in 2016. Sequentially, revenue increased 38% from Q1 2019. Our revenue growth is a result of the successful execution of our commercialization strategy and the continued investment we are making in our direct us sales team, our US clinical therapy support team and the expansion of our international distributor organization. As our internal manufacturing volumes continue to increase, we are seeing improvements in our gross margins achieving 50% again in the second quarter. During the quarter, we announced that we had opened several new hospital accounts, including Oklahoma Heart Institute and Heart Hospital at St. Francis, both in Tulsa, Oklahoma, as well as Beebe Healthcare in Delaware. In addition, we opened several new hospital accounts and health systems, which we have not yet announced, including BayCare St. Anthony's Hospital in St. Petersburg, Florida, WakeMed Health and Hospitals in Raleigh, North Carolina, and UHS Wilson Medical Centre in Johnson City, New York. We also reactivated several institutions that had discontinued the use of Aquadex under Baxter's ownership, including Thomas Jefferson University Hospital in Philadelphia, Elkhart General Hospital in Elkhart, Indiana, and Chad's Jacksonville Medical Centre in Jacksonville, Florida. Looking forward to Q3 and Q4, we have a robust pipeline of hospital systems that need initiating the Aquadex therapy, including the Texas Health Resources Hospital System, which cares for more patients in North Texas than any other provider and represents 26 Hospital locations. Memorial Hermann Health System, which is the largest health care system in Texas, with 13 hospitals throughout the Houston, Texas area, as well as Methodist Hospital in Memphis, Tennessee, Baylor Scott & White in Houston, Texas, University Hospital of Cleveland, St. Joseph Hospital in South Bend, Indiana, DuPont Children's Hospital in Wilmington, Delaware, Methodist Hospital in Memphis, and Texas Heart and Vascular in Austin, Texas. Given our strong pipeline with numerous accounts and hospital systems we're opening – in coming quarters we have decided to make additional investments to expand our field organization to support the growth. During in Q2 we increased the number of clinical education specialists from five to 14. Clinical specialists play an important role in training and educating new accounts on the proper use of the therapy and in driving therapy adoption once the account has been open. On the critical care front, our cardiovascular surgery growth opportunity is significant because the Aquadex FlexFlow system is a simple form of ultra-filtration that can be prescribed by any medical specialty for the treatment of volume overload in patients who are not responding to diuretics, including the cardiovascular surgeon, anesthesiologist, pulmonologist, intensivist and physician's assistant. Removing excess fluid for patients who have undergone cardiovascular surgery is needed to expedite removal from the ventilator, discharged from the ICU and decrease mortality rates. The use of our therapy can be prescribed by many of the decisions involved in the care of the patients without calling in a nephrologist and thus avoiding potential hit in surgery quality scores and potential costs and penalties. In May, we attended the Annual American Association for Thoracic Surgery meeting at Toronto, Canada, where we sponsored a session on improving clinical outcomes with our aquapheresis during the thoracic surgery. The session was moderated by renowned cardiothoracic surgeon Daniel Beckles, M.D., Ph.D., and panel members included Dr. Margarita Camacho from Newark Beth Israel Hospital in New Jersey, Dr. Mehdi Oloomi from Mount Sinai Health Systems in New York City, and Mark Small a physician assistant from Medstar Franklin Square Medical Centre in Baltimore, Maryland. The panel highlighted a discussion on the use of the Aquadex FlexFlow system to help manage risks associated with fluid overload in post cardiac surgery patients. Among the key reasons cited for using our device were the ease of use for both, doctors and other hospital staff, rapid patient removal from the ventilator, decrease in mortality, efficient utilization of hospital resources and the ability of personalized treatment based on the individual patients need. In June, we participated in the American Association of Heart Failure Nurses, 15th annual meeting in Austin, Texas. The American Association of Heart Failure Nurses continues to be an important venue for CHF Solutions as it is the heart failure nurse that often leads the day to day treatment of heart failure patients, including the operation of the Aquadex FlexFlow system. We have focused our training to ensure the delivery of safe and precise therapy with the ability to adjust the fluid removal rate to meet each patient's individual clinical needs, which is a sharp contrast to the unpredictable clinical results using diuretic therapy. Regarding our pediatric strategy, we had a very successful pre-submission meeting with the FDA in mid May to discuss modifications of our label to specifically include pediatric patients. The FDA was very supportive, collaborative and agreed with the 510(k) application strategy we presented. During the pre-submission meaning the FDA recommended we complete several additional bench tests to confirm safety for the pediatric population. The FDA did not require any additional clinical evaluations before submission of the 510(k). As I reported in our first quarter 2019 earnings call, we anticipate 510(k) clearance will have expanded use for pediatrics in the second half of 2019. We are not currently marketing to physicians treating pediatric patients, but continue to receive unsolicited inquiries from pediatric hospitals. In fact six of the country's leading children's hospitals use Aquadex to treat pediatric patients because its capabilities for low volume of extracorporeal blood required by small size patients and Aquadex system is the only available device with this capability. These children's hospitals are treating pediatric patients for many conditions that can result with fluid overload, including kidney replacement therapy, heart disease, cardiac surgery, extracorporeal membrane oxygenation therapy and organ transplant. On the clinical studies front, there are several studies underway and we expect results to be published in the next three to 12 months. First, we remain focused on identifying and researching multiple diagnostic technologies that more clearly inform treatment providers on appropriate Aquadex patient selection, when to initiate therapy, how to manage throughout the therapy and when to discontinue ultrafiltration. We initiated a clinical evaluation with Daxor Corporation to document the synergies between the companies Aquadex FlexFlow system, and Daxor's BVA-100 Blood Volume Analyzer to assist importantly clinicians on fluid volume status, how to manage therapy to achieve positive clinical results. We believe that this collaboration with Daxor is another important building block of our strategy to evaluate diagnostics tools which may refine and maximize fluid management therapy. In addition to the Daxor clinical evaluation, we're working with several hospitals on physician initiated clinical studies. We are working with Mount Sinai Hospital in New York to support their retrospective study that will assess the use of Aquadex in patients who underwent cardiac surgery and the associated clinical outcomes. A total of 700 patients will be evaluated, 200 that results filtration and 500 that did not and match controlled cases. Additionally, Abington Hospital which is part of the Jefferson Health system in Philadelphia has approved a retrospective study with 344 patients, with the aim to define amounts of fluid removal, renal function outcomes and the impact on readmission rates post ultrafiltration. In addition, in Q2, we initiated discussions with a prominent institution in New York City that wants to use Aquadex to treat their advanced liver disease patients. We will have more news to share with regards to this potential indication on our next call. Given our expanded worldwide commercialization efforts we anticipate further accelerated sales grow by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologists, hospitals, intensivist and cardiac surgeons. We're spearheading the growing awareness of the current challenges faced with using IV diuretic therapy only, and thereby introducing the clinical value of ultrafiltration treatment as an opportunity to improve clinical outcomes, reduce re-hospitalization rates and reduce the major expense to the healthcare system. I will now turn the call over to Claudia, who can walk you through our Q2 2019 results and financial details. Following that I will provide some closing comments and open the call to questions.

Thanks, John. Good morning everyone. Turning to the P&L, revenue for the second quarter was 1.7 million a growth of 53% over the second quarter of 2018 and 38% sequentially from Q1 2019. Regarding our operating costs and expenses, I will briefly comment about major drivers. First, regarding our cost of goods sold, in the second quarter of 2019, we continued to see improvements in our gross margins resulting from the transitions of in-house manufacture inventory. Our margins were slightly above 50% for this quarter, 29 percentage points above last year's Q2 margins and consistent with our Q1 2019 margins. Second, regarding our selling and administrative expenses, current quarter expenses have remained consistent to the prior year. As John mentioned previously, we will be making additional investments in the commercial organization to ensure that we are successful in the execution of opening new accounts and also in driving the adoption of our therapy further within an existing account. Next, the increase in our R&D expense that was driven by investments we're making in product development to prepare for a 510(k) submission for pediatric clearance later in Q3 to improve the functionality of our console in catheter into improve the customer experience and drive adoption in the marketplace. The net loss for the quarter was 4.5 million or $1.93 per share, compared to a net loss in the second quarter of 2018 of 4.2 million or $13.03 per share. Regarding our liquidity position, we used 4.1 million of cash in the quarter to finance operations and increase of a $0.5 million versus the second quarter of 2018 million mainly as a result of our investments in R&D. We ended the quarter with approximately $7.4 million in cash and cash equivalents and no debt. In terms of modeling the remainder of 2019, we expect revenue to continue to grow double digits versus prior quarter in the prior year. We expect that as our sales force gain experience in their territories and as we continue to introduce our therapy into new hospitals and hospital systems, and we make additional investments in the commercial organization, we will continue to drive market acceptance and revenue growth. Regarding our gross margins, we expect that it will continue to improve as our volumes and efficiencies increase. Regarding our operating expenses in Q3 and Q4, we expect to see moderate increases in our investments in sales and marketing and R&D. I will now turn the call back over to John.

Thank you, Claudia. Before opening the call for questions let me say that our optimism continues to grow. Looking ahead, we continue to fine tune growth strategies to optimize significant opportunities to improve clinical outcomes and healthcare cost reductions by giving healthcare providers a viable and clinically proven alternative to diuretics. We look forward to continuing to partner with the medical community in the treatment of fluid overload patients and believe these initiatives creates a significant market growth opportunity. We continue to develop and refine our focus to demonstrate a strong business model by driving revenue, which is the key metric our employees, shareholders and potential investors will use to measure our performance. CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing proven solutions that improve the quality of life for these patients and the clinicians who have the passion to treat them. Operator, please open the call to questions.

Yes, sir. Thank you. [Operator Instructions] And our first question is going to come from Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

Hi, John, Claudia and Nestor. How are you?

We're fine. Good morning, Jeff.

So I'm just trying to get a sense for the DA. Looks like a strong top line for the quarter, which is nice to see the ads on the quarter. So give us a sense of the footprint now as far as number of units or number of facilities that exist out there in the marketplace that are in use.

I believe that the number of consoles in place is now at about 170 and we're now in probably a total of 110 hospitals.

Okay and then, are you seeing from higher utilization trends from the new area ads or are you seeing kind of utilization trends on the large across the board?

No, I would say that we're seeing increased utilization, particularly in the cardiac surgery accounts. Some of these hospitals as they're coming online, actually are not just getting one Aquadex console, but they're buying multiple ones initially just to treat the number of patients they have coming through cardiac surgery. So utilization will be higher in cardiac surgery. The addition of the clinical education specialist that we brought on in the second quarter will be impactful in increasing utilization in the heart failure accounts where they'll be more readily available to train the broader number of heart failure nurses that might be covering three shifts in anyone hospital.

Okay, do you feel cardiology is now what on a percentage basis of filter placements should approaching a third or half?

When you say cardiology you mean cardiac surgery?

Yes.

Yeah, cardiac surgery is probably at about 25%, 30% at this point. I would pediatric utilization is about 20% and 25% and the balance heart failure.

Okay and then can you give us a sense; I know it's early days, but with the clearance for the pediatric area. I know that you have some folks now that are using the device in that indication off label. But what's your sense of the size of that marketplace? Or in a lot of the examples is it existing placements that will be utilized within the same facility in pediatrics or there will be add on placements?

It'll be add on placements. We're currently in nine children's hospitals in the US. There's approximately 200, I would say more strategic pediatric children's hospitals that we will focus on once we have clearance. So there's a significant opportunity there. We've estimated the total market for pediatrics at about 100 million and addressable market of about $100 million.

Okay and will that be with a separate sales force or you'll just increase your field education specialist after a launch in an indication?

Yeah, it'll be with the same sales force and as we grow, we obviously will increase the clinical education specialists. We just recently gone to one-to-one where we have one clinical specialist per account manager, we actually have some sales territories were much higher volumes, where we have two clinical specialists supporting as an example as I read through the script, basically, we have a lot of activity in Texas and we've dedicated a couple clinical specialists to the Texas market just because of its size. But it is the same sales force; it does not require that we have a specialized sales force for the pediatric market. It's going to be really more our marketing efforts to basically demonstrate, from a marketing standpoint, the success that these children's hospitals have already observed treating pediatrics with our device.

Okay, got it. And then, lastly, could you talk about anything on the data front inclusive of these two studies that you're talking about? When might we see data, are there any studies going on now, investigator initiated studies that would be seeking data from in any public format at a conference over the coming months?

Start seeing some of these published in the next three to 12 months.

Okay, in addition to the two referenced in your press release?

Yeah, there's others that are going on.

Okay, got it. That's it for me. Thank you very much.

Yeah, thanks, Jeff.

Thank you. And our next question comes from Kyle Bauser from Dougherty & Company. Your line is not open.

Thanks for taking the questions. John, you spoke a bit about headcount in clinical specialties. Can you just remind me how many you have now and then for both buckets? I know you're going one to one. And how many you envision having in both buckets heading over the next 12 months or so?

Sure, I'll let Nestor respond to that question. He's busy day to day building that team.

Good morning, Kyle. That's a good question. We have right now 13 territories, where we have CSs, the clinical specialist as well as the account manager. We expect to finish the year with about 15 territories.

Got it and each territory having their own dedicated clinical specialists, right?

Correct.

Okay, got it. And then it seems like focusing on – or rather than focusing on single hospitals at a time, you've now shifted to opening hospital systems, which is clearly paying off. And it sounds like you're in about 110 hospitals now. Can you maybe give any color on the number of hospitals or systems that are in your pipeline currently, or just kind of any sort of thoughts on how you see that evolving?

Yeah, I wouldn't go beyond the hospital systems that I identified on the call earlier. But the pipeline continues to grow and the challenge. It's kind of an exciting challenge because one of the challenges we have is to keep up with these hospital systems. As I mentioned, Memorial Hermann, 13 hospitals in the Houston area, we're now training in three of those 13. And as we bring those online, we expand to the others. So the hospital system sell, takes almost the same amount of time to sell a system as it does to sell to an individual hospital. So we really do see that leveraging in getting additional consoles placed in these multiple hospital systems.

Right, okay. Yeah, that makes sense. And on the data front just following up. So you mentioned we'll see some forthcoming papers in the next three to 12 months. But also, you mentioned they, they might speak a bit more about patient selection. I want to ask about what you think the results will be. But what factors are you kind of considering? Being refractory to diuretics is one of them, of course, but are there any other factors? I guess I'm just curious about other ways you're looking at stratifying your market opportunity.

Probably one of the keys is the health economics advantage that we bring, the fact that we not only reduce the length of stay, but we reduce the readmission rates. CMS has published data that says that 25% of heart failure patients returned to the hospital within 30 days, which is just a huge number. And the fact that we have such an impact on that rehospitalization expense, along with the penalties that can be assessed is significant. So we're certainly looking at those kinds of outcomes, days in the hospital, readmission rates are certainly key.

Okay, that's helpful. Alright, well, thanks, that's it for me.

Thank you. And I will now I like to turn the call back over to John Erb, CEO for further remarks.

I just want to thank you for joining our second quarter 2019 conference call. And I wish you all a really great day. Thanks.