ImpediMed Ltd

ASX:IPD

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by, and welcome to the ImpediMed Quarterly Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Richard Carreon, Managing Director and CEO. Please go ahead.

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

Thank you, Ashley. Welcome, everyone, and thank you for joining us today. We're hosting this conference call to discuss our 4C for the financial quarter ending 30 June 2020. Before I begin, I would like to once more thank the clinicians, staff and frontline workers in the fight against COVID-19. Every day, they courageously face untold challenges to get us through this global pandemic. I also want to take a moment to thank our employees who have tirelessly transformed this company to effectively support our customers during this challenging times as well. Joining us on the call today is Tim Cruickshank, our Senior Vice President of Finance and acting CFO; and Mike Bassett, our Senior Vice President of Corporate and Strategic Development. I'll be referencing the 4C we lodged earlier this morning, Australian time. At the conclusion of my remarks, we will make -- we will take questions. Today, we'll be discussing our fourth quarter results, and I will also be focusing on our future. We have made great strides over the quarter, and we are confident that the key drivers are in place to accelerate the adoption of SOZO platform over the balance of the year and beyond. This past quarter has been one of the most challenging for many companies, including ImpediMed. And before I go into our strong operational results, I want to provide an update to COVID-19 and put it into context the current U.S. operating environment. In March, the centers for Medicare and Medicaid services recommended hospitals to limit nonessential surgeries in response to COVID-19. The impacts were seen on a number of fronts. There was reduced or eliminated hospital access and sales staff. Capital budgets were either canceled or delayed. Only patients undergoing life-saving procedures were allowed into the hospitals. All of these in addition to the huge influx of COVID-19 patients admitted into the hospitals greatly impacted the entire health care market. And as such, we had the change. As you recall, during our Q3 call, I mentioned we were transforming every aspect of the business to adapt to these new realities, and it was during this past quarter these initiatives began to pay off. Our ability to remotely present, to conduct virtual demonstrations and train multiple staff members across our campuses ensured we stayed in contact with our customers. We brought on new customers, and we continued to expand our current footprint and existing customers as well. And as you know, the SOZO connected digital health platforms gives us the ability to see patients being tested anywhere in the world in real time. Now this has provided us a unique understanding of the key markets. It's allowed us to tailor our approach and better manage and reallocate our resources as we see testing fall off or begin to accelerate. So let me draw your attention to the graph on Page 4 of the 4C. This graph shows the patient testing that was recorded by month for the past 6 months. Please note Wuhan issued their stay-at-home orders in January, followed by Washington State; California and New York in February and Australia shortly thereafter. You can see how the reductions in monthly testing dropped significantly as more countries issued stay-at-home orders. The low point was April, where we recorded less than 2,800 tests. Although we saw dramatic fall-off in patient testing early in the quarter, the reduction had no impact on the company's recurring revenue under its SaaS model, which is based, as you know, on a monthly subscription fee per SOZO unit. However, there were limited new device sales and very few installations during the month of April and May. Pleasingly, a strong rebound was seen in June as the shutdown restrictions were eased. In fact, patient testing for the month of June was at an all-time record high for the company with just over 8,600 tests recorded. This strong rebound has continued well into July. Even during the hype of the pandemic, if patients were brought into the cancer center to undergo life-saving treatment, they are being tested for the early onset of lymphedema using our devices. We believe it clearly demonstrates SOZO becoming standard of care for cancer survivors. Final note on testing. Through the end of June, we had recorded more than 128,000 patient tests.Let me point out several other key indicators that show really the health and robustness of our business. We sold 21 new devices for the quarter despite all the restrictions. These sales included several top-tier institutions such as Stanford University Hospital as well as the University of Pittsburgh Medical Center, just to name a few. The 32 SOZO units that were installed in the quarter set an all-time record high for the company. Our churn rate remains low at just 1%. During the quarter, we lost 2 small, independent therapists that canceled their contracts due to financial reasons or the closure of their business due to the pandemic. We're also pleased to report that 100% of the contracts that were up for renewal during the quarter were renegotiated for an additional 3 years, and we were able to push through an average price increase on those contracts of 6%. So let's quickly review the financial results for the fourth quarter ending 30 June 2020. SOZO SaaS revenue of $0.9 million is in line with the previous record quarter, demonstrating the strength of the recurring revenue from SOZO accounts. With record U.S. installations late in the quarter, we expect a strong acceleration of SOZO SaaS revenue in Q1 of FY '21. Although lower device sales in the quarter affected overall SOZO revenue, the company did see FY '20 SOZO revenue for the year grow by 99% and SOZO annual recurring revenue grow by 53%. SOZO SaaS gross margin steadily increased over FY '20 with 86% gross margins reported in June of 2020, and we expect SOZO SaaS gross margins to increase to over 90% in FY '21. After the successful completion of the entitlement issue, together with the $1.1 million received from the U.S. Cares Act, their payment protection program, the company had significantly strengthened its balance sheet in the period with a closing cash balance at 30 June 2020 of $19.7 million. Net operating cash outflow came in at $3.7 million, and more importantly, we expect it to remain below $4 million for the remainder of the calendar year per quarter. Now let me turn to our 3 key areas of focus as we are confident of producing significant growth over the coming quarters and beyond. In all 3 product categories, we have made excellent progress over the quarter. We believe this progress will create significant value and continue to accelerate the uptake of the SOZO platform. Let me start with lymphedema. We expect the meta analysis paper to be published this quarter. We believe this paper will provide compelling level 1 evidence to assist within listing further amendments to the NCCN guidelines and with submissions to insurers for private pay coverage. In anticipation of the publication of the meta analysis, MCRA, our reimbursement partner, has organized several virtual private pay meetings in the upcoming quarter. In addition, the company has further clinical papers due this year and early next year based on results from the PREVENT trial. A paper has been submitted for review, discussing the risk of subclinical lymphedema by the extent of surgery and irradiation. We are also on track to release the final readout of the PREVENT data early in the new calendar year. The company reached a significant milestone this quarter with the alignment of policy coverage across all 10 Medicare administrative contractors. It's been a lot of work over several years, and it's essential for obtaining private pay coverage. Dave Anderson, who joined as a nonexecutive director during the quarter, is already providing an invaluable contribution in this area. As President and CEO of Healthnow Systems operating the Cross Blue Shield of New York state, he brings a deep understanding of the health insurance providers. Private pay coverage and/or NCCN guidelines, as specified by [indiscernible] and/or LDEX will significantly accelerate the uptake of SOZO for lymphedema. All the groundwork has been done, and we are looking forward to sharing the meta analysis paper and updating you with our progress over the coming months. Heart Failure. As announced to the ASX earlier this month, our enhanced heart failure software has been launched. This came after receiving feedback from various key opinion leaders and then collaborating with Scripps Heart Failure Institute. They have been a great assistance throughout this process, and we can't thank them enough for their work. Initial feedback of the product with its enhanced usability and data visualizations has been extremely promising. We are in discussions with first potential customers, and we would expect to have commercial sales to hospitals this calendar year. In addition to the hospitals, we have started talking to a small number of at-risk insurance providers about how the SOZO heart failure product may help reduce heart failure readmission rates. This is a major cost burden and, although formative, may provide an entry into moving SOZO heart failure into the home market. This is a little bit further down the track and, initially, our focus remains achieving first commercial sales. Renal failure. As stated in the release, the company is formulating its clinical, regulatory and commercial strategies, including discussions with potential partners. While the renal opportunity is still very much in its formative stage, it remains a key focus, and we can report pleasing progress has been made this quarter. In closing, I firmly believe we have successfully navigated this very complex and challenging quarter. We have transformed our business to meet the ever-evolving environment. Make no mistake, this transformation did not take place in the last few months. This transformation began years ago when we envisioned a connected digital health platform that we believe would be able to meet the ever-changing needs of physicians to better serve their patients. And although we never thought that we would have faced these what we have faced in the last several months, we set out to build a company and a technology that would help transform medicine. We believe these past initiatives have put us in a strong position to thrive during these turbulent times. We left the past quarter with a number of promising signs, and I'm optimistic we will continue to [ see ] our technology accelerate and to see continued double-digit growth in the coming quarters. Ashley, those conclude my remarks. Please open up the lines for questions.

[Operator]

[Operator Instructions] Your first question comes from Shane Storey with Wilsons.

[Shane A. Storey, Senior Analyst]

Can you hear me?

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

Can, Shane.

[Shane A. Storey, Senior Analyst]

3 questions for me. Just a minute ago in your prepared remarks, Rick, you mentioned some work unifying reimbursement across the Medicare contractors. Is that in relation to the -- to how payment works on the current CPT code? Or just if you could give some more explanatory information around that would be helpful.

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

Certainly. So as you know, in the United States, there are 10 regions throughout the country that Medicare has split up and has given the management of that business, that Medicare business, to these private contractors. Blue Cross Blue Shield and a number of the large insurance companies run those on behalf of Medicare. And over the years, though physicians could see payment, sometimes they got it, sometimes they didn't. Sometimes they would get it for 2 or 3 months, and then they'd have to go back and fight Medicare back and forth, not in all 10 regions, just in a handful. And over this past quarter, we were able to finally work through all of the issues with Medicare, and now we have continued ongoing coverage that physicians, when they apply, are now getting paid on a routine basis. So that's something that we've been working on for quite some time.

[Shane A. Storey, Senior Analyst]

And then is it likely then to see that continuing? I mean, I know that like a CPT code isn't necessarily forever, and that might change over time. But I guess having established that just across the 10 MACs, I guess is there a sort of an enduring kind of benefit you get from that?

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

Well, there's a couple of benefits, in fact. First of all, no matter what plan you're in, so let's say that your hospital falls on 2 different MACs, for some reason, you've got patients coming in from both sides and so forth. Now you don't have to worry whether they're going to get paid on a regular basis from one, if you were getting paid from the other. So it really helps from a standpoint of I'm a major institution that I no longer have to worry about where they're coming from and who's going to get paid and if there's issues, paperwork and so forth. That is important. The second one, as they start collecting this data nationally and as it starts to grow nationally and they start to review it. And with the oncoming data that we have, we believe we'll be able to strengthen our position and keep our reimbursement very strong in the coming years.

[Shane A. Storey, Senior Analyst]

Okay. My second question, just go back into the SOZO business. Just looking at those first 16 placements into McKesson. Should we have an expectation that we'll see more SOZOs go into those sites over the next 12 months? Or should we be looking at that first 16 as a sort of a pilot that might run through a period of time before sort of broader adoption through the McKesson network?

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

No. The good news at McKesson, having established a national contract with McKesson allows all of the facilities now to evaluate and take a look at it. They no longer have to evaluate it from a contract and the pricing and from an IT and from handling the patient data. They can literally evaluate it from the clinical aspects of it. The other thing, it gives us access to the highest levels of McKesson to have these discussions about a more robust program. The first 16, they were very excited to get started. And even though the McKesson headquarters where their health services group is located in Houston, it's been hit very hard, and that office will not reopen until at least September, they have accelerated the placement of those devices and the installation and training on those devices. So we see them as, one, reviewing how fast we're able to do it, and even during these times, we were able to bring them up so quickly and train remotely. And then we'll be following up with corporate over the next month on what next steps are. So we would expect to see a rollout in the coming quarters on a much grander scale at McKesson.

[Shane A. Storey, Senior Analyst]

Great. My last question just relates to the heart failure piece, just having seen the recent news flow there with Scripps. I'm interested, though, about what the evidence development pathway looks like from here, given you've had that initial success. The company hasn't made reference to the pivotal trial for a little while. So I just sort of want to just check what the current thinking at ImpediMed is on evidence development and driving heart failure adoption sort of beyond that first cohort of, I guess, engaged facilities that have been there for some time now.

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

So here's -- the path forward on the clinical work is we are calling together our Advisory Board once again and asking them what are the next steps and so forth. Given COVID-19, as you know, a lot of clinical trials [indiscernible] patients weren't coming in. We were fortunate enough to be ramping up a number of our studies in heart failure moving on to the pivotal trial. We still expect to be moving on to a trial, but we also believe, based on the data that we have, based on the new software that Scripps helped us develop with the more of a visualization of the more data, that we can actually start to commercialize this. So we see this starting to commercialize as we collect further evidence. The other thing the Advisory Board is considering is a registry. So instead of going into a lengthy clinical trial to do a registry, anybody who takes on SOZO for heart failure can participate in a clinical registry, and we can start to build clinical evidence that way. So we're looking at several different paths as we start to move forward on heart failure.

[Operator]

[Operator Instructions] Your next question comes from [ Peter Gregory ], a private investor.

[Unknown Attendee]

I'd just like to ask about the utilization of the machines that are out there. June, you've had 8,600 tests completed and 560 machines, which comes down, in the month of June, about 15 tests per machine. My gut feeling would be that committed customers who have invested the time and money and their reputation in taking on the machines would have had a higher rate of utilization. I wonder if you could comment on that.

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

Certainly, Peter. So in the past, we've always explained that the testing on our device can be a small number or it can be a large number. We have large facilities who have now more than 2,500 patients that they're following on a number of their devices. We also have small clinical practices that may only be seeing 200 or 300 patients in a given year, and a small subset of those would be at risk of developing lymphedema. So we see it all over the board from doing a small number on a given month to doing hundreds in a given month by device. The other thing, too, is not all of those devices have been installed. So we just reported a record number of installations this quarter. But as we sell them, they go into a hospital. That hospital then has to validate and check that through their biologics department to make sure that it meets all of the safety standards, all the requirements. And then they test the electrical components, and then they move it up to the floor. So that can take up to several months to go through just that process. So even though we've sold them, not all of those are actively testing at this point. So I would tell you this, that one, we do see robust testing. I will tell you that 8,600 coming off of very challenging early in the quarter and then continuing into July looks very promising at our largest institutions. We do have a number of smaller institutions who are only doing their highest-risk patients. Again, we've said this in the past. Really, the testing, you should look at the testing as a leading indicator of the future health of our business. As long as it continues to grow and accelerate, that's a very positive sign that they're starting to test more and more patients on a routine basis. But remember also is that if I'm a large center, and I'm following the protocol, I'm testing the patients on a quarterly basis, not on a daily or weekly basis as I would with renal failure or with heart failure.

[Unknown Attendee]

Yes. Okay. I guess just looking at, I would have thought the test per machine would have been a pretty good indicator for you as to the commitment of customers. I hear what you're saying about the pipeline of machines coming into the process and the rate of testing and perhaps the selectiveness of particularly critical patients per test. But I think a real -- to me a real key indicator of the success of the business is the increasing commitment of prescribers to use it, which means an increasing test rate per machine.

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

Yes. Let me -- if we're talking commitment, I think this was a quarter where you really saw the commitment. First of all, you noticed that we only lost 2 small, independent physical therapists. We had a large number, 16 accounts resigned up their contracts. These are large institutions who opted for another 3 years and a price increase in the midst of a pandemic. So I would say the commitment on these is very, very strong. And you can see our churn rate in the last 12 months is less than 1%. So I think the commitment, we're very pleased with the commitment that we see. And as we start to roll out more features on the device and move into heart failure and to renal failure eventually, you'll see the number of tests going up. I think you'll see that go up dramatically. But as far as commitment is concerned, I think this was the perfect quarter to prove the commitment behind our device. And remember, these large institutions had every right to cancel that contract or put it on hold, and none of them did. They all reupped, and they all took a price increase. So I would say we've got a very strong commitment to our technology.

[Unknown Attendee]

Okay. That sounds good. As I say, I think it's an important measure, so I look forward to seeing the test per machine ramp up in the future.

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

Perfect. So do we. So do we.

[Operator]

Your next question comes from Sally Watson with Oblique Logic.

[Sally Watson;Oblique Logic;Business Owner]

I just had a couple of follow-up questions on some of the stuff you already talked about. I just first wanted to ask about the employment project guarantee. Are there any other likely subsidies coming from the government for your company in particular or your area?

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

Tim, why don't you take that? You've been dealing with the entire PPP program.

[Timothy Cruickshank, Chief Financial Officer]

Yes. Thank you, Sally. Yes, we continue to monitor it. In fact, in Australia, there are a number of programs that the company satisfies the requirements for us. So we've been able to leverage those. They aren't as material as the PPP program, but we continue to monitor the guidance offered by FDA in the U.S. and look for additional opportunities. At this point, the PPP is the main sole material amount of funding that we've received, though.

[Sally Watson;Oblique Logic;Business Owner]

Okay. Great. And I just was wondering, in terms of HF and renal, I noticed that you said that they were going to be more like a daily check-in. That would put that -- those businesses at an order of magnitude bigger than the oncology, I would have thought. Would that be a correct assumption?

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

That's correct, Sally. If you take a look at the total addressable market for heart failure and renal failure, they are larger than the current lymphedema business. I would caution you on one point, though. As we move into a much greater position in the oncology space, testing for bone density, long-term testing for heart failure in that space, testing for nutrition and testing for hydration, those are all major components of the oncology space. It was our vision years ago when we moved to our new platform was to become broader in the total oncology space and not just lymphedema. So I would say, heart failure long term is really probably the largest part of where the future of the company will be, renal and then the entire oncology space. I would start to take a look at it that way, just not limited to the lymphedema.

[Sally Watson;Oblique Logic;Business Owner]

Okay. That's great. And last question -- or last comment, really. And I think the retail investors appreciated the opportunity through the SPP engagement. And that was something that if there were any further credit raises, I think would be well received as well.

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

Great. Well, thank you for that comment. And then we appreciate all the support we've gotten over the years. We're really -- they put us in a good position in a very difficult time with COVID-19. Obviously, as you know, we raised it in the midst of that, and we were very pleased with the results.

[Operator]

[Operator Instructions] Your next question comes from [ Jonathan Scales ] with [ Metra ].

[Unknown Analyst]

I'm just wondering whether you can comment on access to clinicians, especially those who are doing sort of elective surgery and are pretty idle right now. Is the company able to market this whereas more readily now in this COVID environment? Or are things still the same as they were?

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

[ Jonathan ], the impact we're seeing is -- has lessened. So some hospitals are starting to open up. I can tell you, though, that physicians are taking appointments, virtual appointments now. So I would say a vast majority of what we're doing is virtual. We have stepped up in a big way, a significant way, our social media. So contact by direct mail, putting more articles out, everything from LinkedIn to everything we can think of that we can have a touch point with a clinician, we're doing. And we have seen a marked increase in the number of inquiries inbound to the company during these times. And because we can do the presentation online -- and let me tell you how we're doing the demos because we'll do it one of 2 ways. We'll either send you a device with a return label, and we'll show you how to set it up virtually. We'll show you how to do a test, and then we talk about it, or we have a recorded video that shows exactly a patient standing on it, and the screen is split to show what they can see on the tablet. So either way has been very effective for us. So you saw the number of devices that we sold in the quarter and that really most of those, I would say, came from how we launch into the quarter with the virtual sales calls, the virtual demos, and we're setting up and training virtually. So our new world has changed, but I think we have adapted very well. And the good news is physicians still need to see patients. Hospitals still need to buy equipment. And because we have a SaaS model, we can be very flexible on how we price it. We don't -- we can roll in the capital expense of the device. So as you know, we have a capital expense for the SOZO device and then a monthly fee. We can wrap those capital expenses and amortize it over the life of the contract. As hospitals say, they're no longer going to be doing any capital expenses that are not COVID related. So we've been able to adapt and really work out a way to see these clinicians. And so I think we're just going to get better at it in the coming quarters.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Carreon for closing remarks.

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

Ashley, thank you. And I want to thank everybody who joined us on the call today. I know there's a lot going on. A lot of companies reporting. We feel very confident, as I've said, over the future, what we're seeing a lot of promising signs. So again, we expect to be making an announcement over the coming quarter. And again, we appreciate your continued support. Thank you. Ashley, that concludes my remarks.

[Operator]

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.