ImpediMed Ltd

ASX:IPD

Earnings Call Transcript 2021-Q3

[Unknown Attendee]

Good morning, everyone, and thank you for joining ImpediMed's Quarterly Results Investor Webcast this morning.[Operator Instructions] Today's webcast will feature a short presentation from ImpediMed's Managing Director and CEO, Mr. Richard Carreon; and CFO, Tim Cruickshank. This will be followed by a Q&A. [Operator Instructions] Please note we will hold all questions until the conclusion of the presentation.I would now like to hand over to Richard Carreon, Managing Director and CEO.

[Richard Carreon, MD, CEO, President & Executive Director]

Welcome, everyone, and thank you for joining us today. We're hosting this conference call to discuss our 4C for the financial quarter ending 31 March 2021.Joining us on the call today is Tim Cruickshank, our Chief Financial Officer; and Mike Bassett, our Senior Vice President of Corporate and Strategic Development.I'll be referencing the 4C and speaking from the financial presentation we lodged this morning Australian time. This presentation is a summary of the more detailed 4C. At the conclusion of our remarks, we'll be taking questions.[ So Trina ], let's begin on Slide 3, please. Today, we'll be covering 3 key topics: the ongoing strength and resiliency of our business. We'll be updating the market on the PREVENT trial and innovation and how it's fueling our growth.Slide 4, please. We have some fantastic results despite several critical factors that impacted the U.S. health care market during the January-through-March quarter. These factors included daily reported cases for COVID-19. They spiked to their highest levels yet, going from a daily average at the beginning of the quarter of 195,000 cases per day to a peak of 301,000 a day. And by the end of the quarter, the new daily case rates had fallen to about 68,000 per day. Now keep in mind the average new cases per day today are still higher than they were during the second U.S. wave back in August.The second factor was the COVID-19 vaccination campaign instituted by the new administration, which caused significant clinician resources to be diverted to support this major effort. In early January, 326,000 vaccines were administered per day, and by the end of the quarter, the average daily vaccine rate had climbed to 2.8 million per day. The third factor was the February winter storms that plunged large areas of Texas into subfreezing temperatures and overwhelmed the state's electrical infrastructure, causing massive power outages. The height of the crisis, nearly 4.5 million Texas homes and businesses were without power. Millions of Texans went days without power. And to put this on -- in context: Texas has more than 360 hospitals, representing almost 10% of all hospitals in the United States. And this is one of our key growth markets.These 3 events provided significant challenges to the health care system across the U.S. during the quarter. Our weekly patient testing during the same time period experienced large swings throughout the quarter. Because we see these testing patterns in real time, we were able to redirect our resources to areas where we could more effectively impact our business, so despite these headwinds, we posted another very, very strong quarter. Total revenue for the quarter hit a new record high. Our digital health platform SOZO posted record sales and pushed above the $2 million mark for the very first time. Patient tests, although highly volatile throughout the entire quarter, posted record gains. And as we've stated in the past, patient testing is a leading indicator of the true health of our business. And finally, our SaaS revenue grew 100% year-over-year.So I'm going to ask Tim now to provide a more in-depth analysis of our financials.Tim?

[Timothy Cruickshank, Chief Financial Officer]

Great. Thanks, Rick. And good morning, everyone.I'll be taking you through some of our key financial highlights on Pages 5 to 9 of the presentation. All figures presented are in Australian dollars unless otherwise indicated. And as always, please refer to our Appendix 4C and business activity statement for more details on our results.So here on Slide 5. We had another very strong quarter across the business. Total revenue, which comprised SOZO and legacy businesses, was up 35% year-over-year to $2.3 million. Cash receipts from customers grew to a record level as well of $2.1 million. And after the option exercises from the entitlement offer and continued financial discipline, we ended the quarter with $23.9 million of cash on hand.Slide 6, as we move there, highlights the key metrics we use to measure the health of our SOZO business. ARR, SOZO revenue and SOZO patient tests saw healthy increases of 49% to 58% year-over-year, respectively. All 3 metrics were records for the company. SOZO revenue of $2.1 million was a 50% increase over the $1.4 million in Q3 of FY '20.And we continue to show strong metrics in our other key areas, including gross margins on SaaS revenue, which are in excess of 90%; and a negligible churn rate of just 1%. In addition, all contracts up for renewal during the period were renewed as well.The graph in the middle of Slide 7, as we move to that slide, is a visual we've been sharing for some time now. And it really highlights the progress that is being made even amidst the headwinds faced by COVID-19 pandemic. The biggest driver of growth for SOZO revenue during the quarter was Software as a Service revenue or SaaS revenue, which grew by 100% year-over-year. SaaS revenue for the quarter was $1.8 million, of which $1.1 million was from the core business, and $0.7 million was from the clinical business. As a reminder: The company began breaking out revenue from the clinical business in Q1 of FY '21. And the growth in SaaS revenue this quarter, it was a result of, one, continued progress with commercialization in the core business; as well as, two, the first full quarter of SaaS revenue from the AstraZeneca contracts in the clinical business.The graph on the right-hand side depicts SOZO patient tests. As Rick stated earlier, we believe patient testing is a leading indicator of the health of our business. And we saw patient testing increase by over 4,400 tests quarter-over-quarter to over 32,000, the largest increase in a quarter outside of the rebound quarter of Q1 FY '21, during the early stages of COVID-19. And we now have over 215,000 patient tests on file since the launch of SOZO.As we move to Slide 8. Our land-and-expand strategy continues to be a key component of our commercialization growth. As a result of this strategy, ARR for the core and clinical business combined now is $8.2 million.So first, we need to land accounts. We show here over 720 SOZO units have now been sold since launch. With approximately 3/5 of those units in the U.S., that gives the company a solid footprint in a -- in major hospital systems as we work to add this L-Dex to guidelines and expand other applications. And please note the -- that 720 units are separate from the 375 contracted SOZO units that are part of the AstraZeneca clinical trials. Second step, we need to build programs and increase SOZO patient testing and accounts, which is evidenced by the 32,000 patient tests performed this past quarter. And third, we need to expand programs by renewing existing contracts and selling additional devices and applications. In Q3 FY '21, approximately 60% of the units sold in the U.S. came from the expansion of existing accounts, including additional units taken under our previously established master agreements.And master agreements, having those in place with larger accounts, it really greatly reduces the sales process by having IT clearance and standard terms established for the contracts. And another note, as mentioned on our previous call, we'll continue to give more updates on renewal metrics such as average price increases in future quarters as those figures become more relevant moving forward.So all of these steps, in turn, grow our ARR and allow us to leverage the high margins, which are over 90% on SaaS revenue. That come with the SOZO contracts as they reach their second year and beyond.So as we move to Slide 9. This is our balance sheet cash on hand. The company has further strengthened its balance sheet during the quarter as a result of the record cash receipts from customers, strong financial discipline and the receipt of an additional $8.8 million from option exercises. So in total the group received $17.9 million of the $18.2 million, which is a 98% take-up in options, from the option exercises issued to subscribers in the 2020 entitlement offer.As mentioned earlier, cash on hand at -- as at 31 March 2021 was $23.9 million; cash receipts from customers $2.1 million; net operating cash outflows $3.2 million, which was significantly better than the forecasted range of up to $4 million stated on our last call. We expect the net operating cash outflows to remain below $4 million in Q4 as well, which will include some additional spend on product and software development for heart and renal failure.So the increase in cash receipts, the continued financial discipline and the take-up of options led to a very strong quarter for cash flow and a healthy cash balance at 31 March 2021. So in summary, it was a very strong quarter, especially given the challenging circumstances across all our key metrics, including revenues, SaaS metrics and the balance sheet.Thank you all.And Rick, I'll now hand it back over to you.

[Richard Carreon, MD, CEO, President & Executive Director]

Thanks, Tim.Let's go on to Slide 10. Let me update everybody on the status of the PREVENT trial.The principal investigator submitted the manuscript on the primary end point results at the end of February, and it's currently under peer review. We will be notified by the principal investigator when the manuscript is to be published, and we will immediately notify the market of the outcomes of that trial. Now at this point, we don't know the outcomes or the conclusions of the PREVENT trial. However, based on recently published meta-analysis that showed statistical significance based on over 50 studies among then 65,000 patients, we have a high degree of confidence in the outcome of the study. And therefore, we've developed a detailed execution plan, and these plans include a series of physician seminars explaining the trial in detail as well as the significance of the published outcomes. Now our objective is to ensure a thorough and complete understanding of this landmark trial and the impacts it could have on cancer survivors. We will also launch a series of patient outreach programs to ensure cancer patients understand why they should be demanding to have regular L-Dex testing.We'll also begin an aggressive program with commercial payers with the sole purpose of obtaining coverage and/or payments for routine L-Dex testing for cancer survivors. And the lead principal investigators have agreed to submit an application to the NCCN cancer guidelines for inclusion of our technology in those guidelines for lymphedema should statistical significance be achieved. Again let me stress we don't know the outcome of the trial. However, we are planning to launch a multifaceted approach once we are made aware of the outcomes and we've informed the market.Slide 11. Let me spend a few moments on our innovation and the impact it's having on our business. In the 3 years since the introduction of SOZO, our software operating system has gone through 3 major upgrades. And in the coming weeks, we'll introduce our fourth upgrade. As we can see from the slide, we've started with a simple interface that provides basic L-Dex and trending data. Version 4 is an intuitive redesign taking into account the input from major users across the globe. It enhances the security of the patient data we collect. It provides clinicians new tools for managing very large patient populations and provides powerful new data such as reference ranges for body composition measurements as well as segmental data.Now we believe the reason we have such high renewal rates, 100%, as Tim pointed out earlier, and a low churn rate that's been no higher than 1% is our ability to continue to innovate and improve what we offer clinicians. I cannot stress enough this is a significant competitive advantage that allows us to expand our footprint in existing customers and also expand the value that they see that our technology provides. We've also completed the initial development of our next-generation digital platform [ SOZO II ]. This new platform will fully incorporate requests made from our heart failure and renal failure clinicians.Slide 12. We've made a number of advancements in the heart failure space this quarter. We received an expanded FDA clearance for the use of a heart failure index which we've trademarked HF-Dex. This clearance includes the use of reference ranges. We also continue to work with the FDA on the removal of our contraindications for the use of our device with implantable pacemakers and cardiac defibrillators. We've made some very good progress with them, and we feel confident that we will see the contraindications removed in the future.Scripps institute published an article on the clinical utility of SOZO in monitoring of heart failure patients. And they also will be presenting an abstract next month at the 70th Annual Scientific Session of the American College of Cardiology on SOZO's ability in identifying heart failure patients at risk of hospital readmissions at the time of discharge.Renal failure is another focus area for the company. We've made great strides there as well. The potential clinical utility of SOZO in managing patients undergoing dialysis was validated by a major dialysis provider. And we expect to submit a request for new indication to monitor patients undergoing dialysis to the FDA in the coming months. Should a clinical study be required, we are currently evaluating potential partners.And with both heart failure and renal failure we continue to deploy our devices globally in support of the ongoing AstraZeneca studies. And by the way, they've been a great partner to work with. And we will further engage the cardiologists and nephrologists involved in these trials who are gaining exposure to our technology for the very first time. Now we see this as a great opportunity to expand our footprint in both of these markets.Slide 13. We've already covered this information and detailed in a previous slide. So like I said earlier, we've accomplished a lot this quarter across all 3 of our focus areas: lymphedema, heart failure and renal failure. Let's move on to Slide 14.Let me review our upcoming milestones. Publication of the PREVENT trial manuscript is the single most critical item on this list, and as we stated earlier, we will notify the market immediately upon its release. We'll continue to advance the prior -- private payer coverage and payments for L-Dex testing. We'll continue to progress L-Dex being added to the NCCN guidelines. We'll be, shortly, releasing our 4.0 software I spoke about earlier.We'll expand our commercial sales in heart failure. Now obviously this is contingent on improved access from reduction in COVID cases. We'll begin to establish pilot programs in key heart failure centers. We'll continue to work with the FDA on obtaining clearance for removal of SOZO contraindications for implantable pacing and cardiac defibrillators. And we'll see the publication in the American College of Cardiology the abstract that supports HF-Dex in risk-stratifying heart failure patients.And we'll also continue our global deployment of devices for the AstraZeneca trials. We'll also continue to gather feedback from the early experience of cardiologists and nephrologists involved in the AstraZeneca study both in the U.S. and internationally. And we'll continue to progress the regulatory and commercial strategies for renal failure.Now in closing. I believe we've built a strong and resilient, high-growth business. We're driving this growth through continued innovation and effective execution. With the upcoming publication of the PREVENT trial, we will open up a whole new set of opportunities for ImpediMed. I want to thank you for your continued support.This concludes my remarks. We are now ready to take your questions.

[Unknown Attendee]

[Operator Instructions] Our first question comes from Scott Power.

[Scott Power]

Rick and Tim, can you hear me okay?

[Timothy Cruickshank, Chief Financial Officer]

Yes, we can, Scott.

[Scott Power]

Yes. Great, terrific. Congratulations on a great result. Rick, I'm just wondering. You've called out a number of issues that you've experienced in this first quarter, the COVID cases increasing, the winter storms in Texas. However, you've achieved extraordinary growth in the number of patient tests and annual recurring revenue. When we think about the next quarter, given things just are opening up, with vaccines being rolled out, et cetera, how is this first month looking for you? And generally how can we think about the growth that's coming through? Because despite all the headwinds, you seem to be being able to post extraordinary growth.

[Richard Carreon, MD, CEO, President & Executive Director]

Well, thank you, Scott. Listen, we see the opening of the market. Obviously cases are down, like I said, but understand this. The rates are still as high as they were in August, and so we are still seeing some issues. And we're still seeing some spikes in some key markets. Hopefully, we're not going to see any more storms in Texas because they're in their summer months. I can tell you this, though: We are seeing some very positive results and we continue to see strong growth in our patient testing. The good news is the large variability, the large swings we had in patient testing in the last quarter, we've not seen that in the early weeks of the quarter, so we're feeling very positive about this quarter. So we're feeling that there's a lot of positive momentum. And obviously, with the publication of the PREVENT trial in the upcoming biggest congress of the year, The American Society of Breast Surgeons, which is coming up this week, we're feeling very, very positive.

[Scott Power]

Great, okay. My next question: You've -- talk about the 215,000 data points you've collected, so far. What does that actually mean to you? And what's the value of that?

[Richard Carreon, MD, CEO, President & Executive Director]

Okay. So this is -- this can get very exciting, so I'm going to try to keep it succinct here. So the data points that we're collecting off of these patients are helping us in a number of ways. First of all, we're using the data to support applications to the Food and Drug Administration. A while back, the FDA said that real-world data is just -- could be just as effective as clinical trials. And so for instance, we were able to obtain our PCM, our protein calorie malnutrition, indication largely from data that we had already pulled from patients using SOZO. So the more data we collect, the larger and richer that database becomes that we can now go in and analyze and look at. The other thing [ we used that ] information for is we refined our algorithms to become more accurate, faster. We've also used the data in the heart failure space, where we were able to tell that -- what was critically important there was the highest degree of accuracy. And the clinicians said you've got to be able to say when the test is at its -- at the best it can be. We were able to go back and pull all of the patient records who had tested under heart failure, and we were able to come up with an algorithm that grades those tests. So if it's a C-level test, the test isn't even displayed and they have to retake it. If it's a B, they have to accept it. And if it's an A grade, it automatically is accepted.So the data -- we're just starting to mine this data, Scott. And we believe really the future of the company is [ good data ]. So to put it in context: There's more than 215,000 patient tests. We've got more than 650 million data points on the human body [ now ]. Each test, each [ sweep ] we have provides a significant amount of information. And so it's going to be up to us in the future now to start to be able to monetize this in unique and special ways.

[Scott Power]

Okay. And just a final question for me just on that renal failure. So just continuing with that data point or the information you're collecting. How may that help you with the work you might do in terms of a trial or information to be provided to the FDA to get that indication approved, cleared?

[Richard Carreon, MD, CEO, President & Executive Director]

Yes. So the key thing we're looking for, for the -- the first step for the FDA is for us to get a clearance for the clinical assessment of renal failure patients. And so what we're looking for there is to use the data that we've collected and we continue to collect in a way that shows the FDA that we can accurately show fluid buildup in these patients. So again the clinical assessment. The fluid buildup is just one part of the full assessment that they have because today the only thing they have, just like heart failure, is a simple [ scale ]. And so they judge how much fluid they should take off by somebody's weight. Well, we want to start to be able to provide a much richer data. Now our second phase of that is to be able to provide them the amount of fluid that they should pull off of these patients over time based on a clinical assessment.So we'll -- we see this as a 2-phased approach, but we're ready and are preparing an application right now to the FDA with the current data that we currently have and to start the negotiations with the FDA. We're very excited about the information that we were able to pull. And I think, more importantly, we were excited about the fact that a major dialysis provider really confirmed for us that this is a key area of opportunity for us.

[Unknown Attendee]

I'll just read out the next question. "I'm very happy with your performance, but I'm interested to know when you feel you'll enter cash flow positive status."

[Richard Carreon, MD, CEO, President & Executive Director]

Well, Tim, I'll let you take that. And if I need to add to it, I'll certainly add to it.

[Timothy Cruickshank, Chief Financial Officer]

Great. Thanks, [ Trina ]. And thanks, [ Andrew ], for the question. So I think the best way to look at this is by looking at our net operating cash outflows over the past few quarters. So over the last 3 quarters, we've averaged $3.3 million in net operating cash outflows. And we've indicated that Q4 will remain below $4 million, so when you take that and look at the cash balance of $23.9 million, it gives you a bit of an indicator. While we don't give guidance or forecasts on cash flow beyond next quarter, I can reemphasize that we will continue to have the following focus areas from a cash flow perspective: driving increased revenue and cash receipts as we achieve milestones, investing in critical development areas but all the while continuing to show strong financial discipline.

[Unknown Attendee]

The next question is, "With all of your group contract master agreements [ that have been ] signed, are you now starting to see activity with these that COVID obviously stops progressing?"

[Richard Carreon, MD, CEO, President & Executive Director]

Yes. So let me address that. Obviously everything that I talked about earlier did impact the business. Now I can tell you this, though, is that we have expanded our master agreements. More than 20% of the devices we placed this quarter were an expansion of our master agreements. And so in those markets where the hospitals were overrun or decided to stop purchasing outside of those things that really were focused on COVID-19, we were able to go to other markets and expand in those. So I think the COVID-19 last quarter had slowed in some of those areas, but we still continue to engage and work very closely with all of the master agreement accounts, the relationship that we are building with U.S. oncology and so forth. So we expect great things on those over the coming quarters. We're very excited about those opportunities [ as they are. And as they see and ] opening and bringing back patients, we will start to expand those.

[Unknown Attendee]

The next question. "Great positive results. Did AstraZeneca have exclusivity over SOZO and the trials? Is there an opportunity for any other pharmaceutical companies to run trials in combination?"

[Richard Carreon, MD, CEO, President & Executive Director]

Yes. So AstraZeneca does not have an exclusivity for SOZO. They are using SOZO because they tested a number of devices that were looking for [ fluid ], and they found ours to be the best. So obviously we announced one trial. Then another group at Pfizer working on a different drug combination came to us and asked us to do [ that ]. I can tell you we have already been approached. And we have already supplied devices to a smaller clinical study from another clinical site -- or excuse me, from another large strategic. So we are seeing this as an opportunity. And we will continue to provide devices in that fashion as that opportunity is -- comes up for us.

[Unknown Attendee]

Next question. "Of the hospitals you were in, what level of penetration [ of ] potential patients are you at?"

[Richard Carreon, MD, CEO, President & Executive Director]

I will tell you, today, that is across the board. And I'm not trying to avoid the question, but let me tell you we have -- New South Wales, we now have 40 devices throughout their hospital systems, so I would say we have a great penetration there. We have KU that has more than 20 devices, Kansas University Cancer Center, one of our clinical sites for the PREVENT trial as well as one of our key strategic partners. I can tell you, though, that of that account, we're only -- we have a high penetration. We're probably testing upwards of 90% of the breast cancer patients. And I can tell you that they -- this summer, so in the next month or 2, they will start to expand into the gynecological cancers as well as the prostate cancer and so forth. So -- and melanoma. So we start to see that. They're also starting to use our device in some other exploratory areas where fluid management is critically important.So I think it's across the board. Obviously, when a hospital first starts out, as we've said in the past, typically a hospital will buy 1 or 2 devices. And then after several quarters, they typically start to look at do they need additional devices, not that they're running more patients through, but they're trying to make sure that the patients that they are putting through on the device have readily accessible avenues of approach to those devices. So if I'm on one part of the campus getting chemotherapy, if I'm in another part of the campus getting radiation, they don't have to continue to come back to the same location. So I think it would be hard for us to do that, especially since the fact that more and more facilities are using them for various things. We have a hospital who uses our device strictly for hydration for their head, neck cancer patients. So again it would be hard for me to judge that.I can tell you, though, that we do know the level of use at every hospital who has our device because we do have a connected device. And we can see the number of tests that are being done. And so we monitor the progress and the continual upswing of testing that's done in every account. And if we start to see a falloff, we find out exactly is it because of COVID. Is it because of an issue? And what can we do about it? So again we have great insight to our hospitals who currently use our devices.

[Unknown Attendee]

Next question. "Although sales continue to improve at record rates, cash burn run rate continues to concern me, [ as in yet ] another capital raise sometime in 2022. Are you looking to partner with a larger medical device company to help sales and marketing?"

[Richard Carreon, MD, CEO, President & Executive Director]

Thanks for the question, [ Luke ]. I will tell you this. I mean we're going to get a very good indication of how we're going to go about the oncology space. We are becoming a big player in that oncology space from a standpoint of the acceptance of our technology. We believe that the PREVENT trial will be positive and show statistical significance. And then we believe we'll start to see traction on reimbursement. That reimbursement should be a great accelerator to our current revenue stream. Now does that mean we're interested in partnering with other strategics who may be able to accelerate it? We're always open to those, especially in the heart failure arena. We do know that in the -- excuse me, yes, in the heart failure. And in the renal space, as you know, you have 2 major players that control about 80% of the global market. So that doesn't require a large organization. So I will say we'd be very open to looking at opportunities that may help accelerate our growth without giving up control of the opportunities itself and the future growth that we see.

[Unknown Attendee]

[Operator Instructions] If there are no further questions, I'd now like to hand over to Mr. Carreon for closing remarks.

[Richard Carreon, MD, CEO, President & Executive Director]

I want to thank everybody for joining us. Again it's been a great quarter. We'd like to thank you for the support. And we're looking forward to the time in the near future that we can have another call and walk you through the long-awaited PREVENT trial. Again, we believe that, that is a major inflection point for the company, so we look forward to doing that in the coming months.Thank you for your time today.