Viemed Healthcare Inc

TSX:VMD

Earnings Call Transcript 2021-Q3

[Operator]

Greetings, and welcome to the Viemed Third Quarter 2021 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Todd Zehnder, COO. You may begin.

[William Todd Zehnder, COO & Director]

Thank you. Good morning, everyone. Please note that our remarks in this conference call may include forward-looking statements under the U.S. federal securities laws or forward-looking information under applicable Canadian securities legislation, which we collectively refer to as forward-looking statements. Such statements reflect the company's current views and intentions with respect to future results or events and are subject to certain risks and uncertainties, which could cause actual results or events to vary from those indicated in forward-looking statements. Examples of such risks and uncertainties are discussed in our disclosure documents filed with the SEC or the securities regulatory authorities in certain provinces of Canada. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements made in this conference call today are made as of the date hereof, and the company undertakes no obligation to update or revise any forward-looking statements, except as required by law. The third quarter financial results news release, including the related financial statements are available on the SEC's website. Now I'll turn it over to Casey to get things started.

[Casey Hoyt, CEO & Director]

Thank you, Todd. Good morning, everyone, and thank you for joining our call today. We are excited to announce another record-breaking quarter, driven by the hard work and determination of our employees. It is our growing team of nearly 600 employees, along with their extensive experience and strong relationships that enables our organization to find opportunities to improve the lives of the patients we serve every day. Our people are our most important asset and our ability to remain resilient during these unprecedented times is directly tied to their unwavering commitment to our patients. We once again would like to take this opportunity to thank them for their dedication to excellence and for their devotion to our mission. We are also thrilled to welcome to our team the 13 additional sales reps on-boarded during the third quarter. These new hires bring our total year-to-date sales hirings to 46, right on track with our planned goal of adding 60 by year-end. Despite the surge of the Delta variant of COVID-19 during the quarter in many of our key markets, we were able to leverage our investments in people and technology to grow the core business by approximately 6% over the previous period and 12% over the third quarter of 2020. During the time in which our access to referral sources and physical facilities was impacted, we prepared for better days by completing project Next Level, a nationwide training program. So in the third quarter, our sales personnel returned to the field equipped to optimize their sales strategies and invigorate their communications to physicians and patients with a deeper understanding of the additional products and services Viemed offers. As a result, we are seeing a strong increase in the sales associated with oxygen and sleep. For example, in the third quarter, oxygen revenues increased by 16% over the second quarter. We are enthusiastic about these initial trends driving revenue growth and further diversifying our product mix. In addition to the tailwinds we experienced from our training initiatives, the Philips recall is creating opportunities for Viemed to capture market share from competitors that lack access to vendors and equipment. Early in the recall process, our supply chain professionals were able to secure a strong pipeline of equipment by leveraging our scale and previous relationships with alternate manufacturers. Based on our current projections, we do not anticipate our access to the supply of equipment to limit or constrain our expansion, but rather will contribute to our growth rate for the remainder of the year. Our ability to rise to the occasion and meet customer needs during this challenging environment demonstrates to both patients and providers that Viemed is a reliable partner. As a result, in the third quarter, PAP revenues increased 22% over the previous quarter. Ultimately, the recall is leading to an incredible opportunity for patient acquisition. While we continue to actively identify potential strategic acquisitions, our observations of current valuations indicate that a patient acquisition strategy is an effective use of capital in the near term, allowing us to grow substantially while preserving capital for transformative acquisitions down the road. Another core strength that emerged during the pandemic is our ability to source talent. When resources became constrained at frontline facilities during the peak of the COVID-19 crisis, Viemed was able to help source over 300 temporary health care staffing positions for our collaborative partners. The trends are clear. We see that staffing competencies will become a critical success factor in the health care industry over the next 5 years. Based on our historical success in this area, we are excited to announce the formation of the Viemed Healthcare Staffing division, which will be branded as VHS. The staffing division is expected to serve as a robust recruiting platform for internal and external clinical health care positions. We believe that this recruiting engine will differentiate us from our competitors by allowing us to source industry-leading talent as well as provide a supplemental revenue stream while supplying contingent and contract-based resources to health care facilities. Another area where Viemed is emerging as an industry leader is through our facilitation and sponsorship of medical research. As previously announced, yet another peer review study was published during the quarter by the American Journal of Managed Care. This study supports the growing body of evidence that patients with COPD struggling with chronic respiratory failure who utilize NIVH therapy will live longer as well as go to the hospital and emergency department rooms less, therefore, enjoying an improved quality of life. As our investments and initiatives to support the scientific body of evidence mature, our next step is to equip providers, health systems and governmental organizations with the information to help patients obtain the care they need as well as hopefully reduce overall cost of care. Finally, I'd like to provide an update on our technology initiatives. We believe that our long-term value proposition is uniquely tied to our ability to combine the high-touch service delivery with high-tech resources. Our proprietary patient connectivity software has continued to demonstrate this value during the Delta variant surge. In addition to our ongoing COVID-related contact and vaccine tracing activities, our response to the pandemic has also included investments that allow health care professionals to leverage technology to treat their patients remotely. We previously announced the rollout of our Engage platform, which is our hub in the home, providing our RTs and physicians a remote patient monitoring tool and telehealth solution to safely manage patients on a real-time basis. During the quarter, we saw a further rapid adoption of the technology within the number of patients onboarded now exceeding 3,000. When combining Engage with our proprietary Viemed View and Connect platforms, we believe that we are well suited to become a leader in the evolving industry of technology-enabled home health care. With more on our operations, financials and regulatory landscape, I will now turn the call over to Chief Operating Officer, Todd Zehnder. Todd?

[William Todd Zehnder, COO & Director]

All right. Thanks, Casey. In reviewing the financial results, all figures are in U.S. dollars and the full results have been made available on the SEC website as well as SEDAR. Our core business generated net revenue of $27.8 million during the third quarter of 2021 as compared to net revenues of $24.9 million in the third quarter of 2020, which equates to a 12% increase. Our sequential growth for the core business was 6%. We were very encouraged to see our growth be spread out amongst our vent, PAP and oxygen business lines. During the third quarter, we generated approximately $1.5 million of revenue from the ongoing COVID-19 pandemic, primarily related to vaccine and contact tracing revenue generated during the quarter with our established call centers. As we have previously discussed, by moving quickly during the pandemic, we've been able to be a resource to multiple groups through our call center, and we will continue to do so as long as there is an ongoing need. Our margin percentages, both gross and EBITDA, are once again very healthy. And as we indicated last quarter, we have begun to normalize without significant COVID revenue influencing our total numbers. Our gross and EBITDA margins during the quarter came in at 63% and 25% accordingly. Our third quarter gross and EBITDA amounts came in at $18.4 million and $7.4 million, respectively. We have continued to diversify the business while growing our vent revenue, which is a great sign that our complementary products are significantly growing. The oxygen and PAP businesses are benefiting from our national rollout and as well as unique circumstances related to the COVID pandemic and the ongoing PAP recall. Our third quarter revenue from vents was approximately 78% of our core revenue as compared to 82% in the third quarter of 2020. Our SG&A for the quarter totaled approximately $13.3 million as compared to $13.6 million in the third quarter of 2020. Once again, when looking at prior year comparison, those amounts are impacted by all of the activity going on with the COVID-19 supply revenues, and our stock price volatility has had a positive impact during the current year. We once again are staying committed to hiring people to help grow our company and serve more patients. While the labor market has become more challenging, specifically with the clinical folks providing such great care, our culture and business model has kept us competitive, and we have not seen any issue continuing to care for our patient base. We took the opportunity during the current quarter to use some of our cash on opportunistic ways to grow. The most significant uses of cash were on equipment, where we used approximately $5 million on PAP and vent purchases. By getting ahead of supply chain issues, we have been able to capture business that our competitors were unable to serve. We additionally took the opportunity to buy an additional 5% of Veristat as we continue to see the growing trend of remote patient monitoring around the country. Moving on to the ongoing OIG and CMS issue related to our NIV claims. We are continuing to work with CMS and its contractors through the appeal process to assess the medical necessity of the patients audited by OIG. The first round of appeals was upheld by CMS' contractor, and the company will be filing appeals to the quick in the next couple of weeks. We are hopeful that this round will have more of an individual clinical review rather than adopting the OIG position. As a reminder, due to the 4-year look-back window, it appears that 39 patients are being reviewed by CMS and the total exposure if all failures were upheld would be $9 million. Of these 39 patients, 15 of them have been detail reviewed by CMS in prior audits and all of them passed complex medical review. And as confusingly, 2 of the patients being reviewed appear to be outside of the 4-year look-back window. These, amongst many other arguments are currently and will continue to be worked with the various levels of appeal. The company has not accrued any liability related to this ongoing matter as it continues to believe these patients qualified for the CMS rules, and it eventually will be overturned through the appeals process, which includes reconsideration and ALJ and will take some time to ultimately work through a final resolution. We have taken this opportunity to begin a process of our first formal attempt to establish formulary rules related to NIV, and we are working diligently to provide input to the coverage group at CMS. We've once again been visiting with current and prospective investors through industry conferences and nondeal roadshows with our existing analysts and banking relationships. We appreciate the ongoing support from both the buy and sell side during this year. At this time, I'm going to turn it over to Casey to wrap things up.

[Casey Hoyt, CEO & Director]

Thanks, Todd. Whether be it through access to care for patients or access to clinicians, our health care system has certainly been tested by the pandemic with patients filling hospital beds throughout the country at a time when clinicians are hard to come by, We are seeing our physician and hospital referral sources being more engaged to develop deeper partnerships designed to treat more people in the home. Viemed's nimble track record are creatively being in position to respond to the nation's needs at a moments notice puts us in a perfect position to capitalize on these opportunities. Our value prop of placing experienced clinicians in the home utilizing proprietary clinical data analytics to measure success is the perfect blend of high touch with high tech desired by our partners. As we move to bolting on Viemed health care stacking as part of these programs, we view the staffing division being impactful in 2 ways: first, our dedicated staffing recruiters will fulfill a growing demand for the placement of clinicians throughout the referral sources we serve; and second, we will be developing a more sophisticated and dedicated strategy to constantly fueling Viemed's proven organic growth engine with the clinicians our company requires to treat the underserved COPD population. These are the growth levers that we will be pulling on throughout the end of the year, of which will have the largest impact on our future growth rate. Our outlook for our business is as bright as ever. We are in an environment where we have an increasing demand for our service, our clinicians and our expertise. Make no mistake about it. At Viemed, our management team considers the perceived headwinds of the health care industry as a unique opportunity to capture market share at exponential rates. We will continue to be resilient and relentless in our pursuit to help as many people as we possibly can and ultimately drive financial success for our shareholders that we are privileged to serve. This concludes our prepared remarks. We'll now open up the floor for Q&A.

[Operator]

[Operator Instructions] And our first question is from Frank Morgan with RBC Capital Markets.

[Frank George Morgan]

Yes. I guess my first question, when you think about this most recent Delta surge comparing it to some of the past surges, do you see anything really different here? Or is there anything that might be it foreshadowing for how -- if we do have another surge at some point in the future, how your business has adapted and adjusted to that? And I guess on that point, any additional color you can provide for us on what you're seeing so far in the fourth quarter as it relates to the NIV and the O2 and the PAP. That's my first question.

[Casey Hoyt, CEO & Director]

I'll start, and I'll let Todd chime in as he wants. The -- I would say the only difference with the Delta surge compared to the, I guess, the original surge is that it was in different pockets throughout the country at different times. And that was very evident to us and just kind of hard to really track in place. And naturally, that just limits access points at different points in time as well. So it was just a little bit harder for management to track or what to expect in certain areas because of that. But look, it's -- there was -- July was one of our better months and then we got slowed down a little bit by the Delta surge. And as we spin out of these things, we know just from the track record of once you -- on the backside of that, business comes back up and turns back on, if you will. So we're optimistic about getting through this and certainly have the tools in place, Frank, to operate in this environment if indeed, it doesn't go away. So we're not sitting there counting our chicken back that the pandemic is over by any means. But once it does happen, it will be good for the business.

[William Todd Zehnder, COO & Director]

Yes. And just to add one piece on to the final part of your question. October was a good reversal of while it wasn't as strong as July, it was better than September. So we look at trends a lot of times, and we look at cities and how many of our reps are having struggles versus not having access struggles, if you will, and the fact that October had a positive trend from new patients is a good sign, although still hoping to get back to that full access that we saw in July that, like Casey said, was probably our best month in the last 1.5 years since the pandemic started.

[Frank George Morgan]

Got you. And I guess, nice margin expansion here. And obviously, all our providers are talking about labor issues, and I know your labor mix is different here. But are there any pockets that you would call out that you're more mindful of or watching more closely and having to address?

[William Todd Zehnder, COO & Director]

Well, I think, clearly, we all see that respiratory therapists are in very high demand, and we employ 280 or probably somewhere between 275 and 300, of which 60 or so are in our sales force. So the key drivers to growing our business are finding more sales people and finding therapists to take care of the patients. So that's the biggest need for us. We've always done a very good job of recruiting and retaining RTs, but they are in high demand as anybody out there. So it has not become an issue for us servicing our patients. We have not had that problem at all, but it is just a little bit more difficult to keep the rate of new hires coming in. It probably just exacerbated our need to have the staffing division. We've had so many partners around the country, states, hospital systems, other partners looking for employees during this crisis and we just needed or RT to service our own patients. So the fact is that we just heard it so much and we're a recruiting engine that it was time to bring some more muscle into that group, which is why we did it. So while there's other needs throughout the business, for sure, the RTs are definitely the ones that are front and center for us.

[Casey Hoyt, CEO & Director]

And I may -- I'll add is that if you look at our business compared to a home health, we don't need our clinicians to bill for our service. In other words, we might lose an RT in a certain area but it's up to us to just kind of backfill some support and pull from another area, but we continue to bill for our patient demographics. So that would be kind of like the difference between our home medical equipment business, which has a billable equipment code versus billing for a person, if you will, in home health.

[Frank George Morgan]

Got you. Last one, and I'll hop. Just you mentioned becoming much more proactive in trying to address, I guess, like a clinical criteria. Any color on kind of in a perfect world, how would you like to see that laid out? And I'll hop.

[William Todd Zehnder, COO & Director]

Yes. What we're doing right now is we've had some discussions with the coverage group at CMS regarded to trying to file for a -- for a full NCD reconsideration. And what we are waiting on at this point is Dr. Fraser is finishing a full data study that is not using medical or a limited data set through Medicare. And we are making a few additional tweaks to that study to make sure our reconsideration for the NCD is supported through data and the study that will ultimately get published. That should be forthcoming during this quarter. And so our hope is that we could potentially file for a reconsideration, which is just giving our opinions to the coverage group at CMS. It would put our recommendations on what event NCD should look like. And for the first time, we'd have real data to support it. I mean CMS has gone through 3 or 4 different processes on then NCDs, and it's not an easy topic to tackle, but we're as incentivized as anybody to make sure we get it in there and get it right. So hopefully, once the data is finalized, we are going to get it all hemmed up and filed in with CMS. So fourth quarter is our goal.

[Operator]

[Operator Instructions] Our next question is from Brooks O'Neil with Lake Street Capital Markets.

[Brooks Gregory O'Neil, Senior Research Analyst]

I apologize, I got on a few minutes late, so if I ask you about something you've already talked about, you can either skip it and we can circle back around later or you could give me the short answer. So first thing I was just curious about, did you talk at all about any progress with the VA?

[Casey Hoyt, CEO & Director]

We didn't mention anything about the VA. Our -- I guess it should be talked about. Our success with the VA this past year, Brooks, has been in staffing. So we did talk about placing 300 nurses across the country in facilities that were in need of staffing. A lot of those guys were VA facilities. So -- We're still seeing that demand, and we're going to be fulfilling it with the beginning -- in the launch of our new staffing division, Viemed Healthcare staffing. The pilot study, which we were talking about a lot, Brooks, which you probably wanted to hear an update on that has been changing. They're moving from pilot mode into direct to fixing the contract mode. That's somewhat good news because it's them saying, "Hey, look, why do we need to do a pilot study whenever you have all this published data already that we're seeing and it does work." I'm like ding, ding, ding. I've been talking about this for years now. So that's a good thing that they're making a shift. But look, I'm hesitant to just included in the script because it changes on a dime. And -- but that's the update for you.

[Brooks Gregory O'Neil, Senior Research Analyst]

Perfect. That's helpful. And then I guess, secondly, I'm curious, these OIG investigations always puzzle me. I'm sure there's some rationale for why the OIG should look over what CMS has already reviewed and come to a different conclusion about what CMS does. But, a, can you understand or explain the rationale that you sense from the OIG guys for why they're doing this? And then secondly, could you comment, do you think it has any direct impact on, a, the way you run the business; or b, customer perception of Viemed right now?

[William Todd Zehnder, COO & Director]

So on the first part, I understand the OIG as an independent organization within the umbrella of HHS and has a job to do. So we fully understand that. But there is no part of any of us that understands the ruling that they have made on our patients and the position that they've taken because it is 100% unsupportable, which is why we, as an organization, are so determined to get this fixed because it's just an unfair report and an unfair set of processes. They came into audit one thing. We had 100% pass rate and they picked something else that has no justification. So I understand where their role is in the HHS umbrella. I don't understand their position. On the second piece, no. We've been dealing with this audit since 2018 and not at one time have we done anything different than our internal processes. We screen for these patients. We pick the right patients. We know the patients that need ventilators, and our data that is being published supports it. If they're hypercapnic and if they meet other conditions, they need to be on a ventilator because it saves their lives and it saves money for the health care system. So no, we have not changed our position one bit. And does there have a negative perception. I can't answer that. I'm sure people read this nasty report and think we're doing the wrong thing, which once again, is why we're so determined to get to the right answer, and it may take some -- a few rounds of appeals, but we're going to continue to fight for our patients and our employees and our company and shareholders.

[Operator]

And our next question is from Doug Cooper with Beacon Securities.

[Doug Cooper, MD & Head of Research]

Just one follow-up on the OIG stuff. When do you expect final resolution on this, one way or the other?

[William Todd Zehnder, COO & Director]

Well, we're going to file our reconsideration request within the next couple of weeks, and that's probably a 3-month decision process. And depending on how it goes, if it goes -- we may have to bring it to ALJ, which is a court system. It's basically the court system for medical claims. If we have to go to that route, which right now, I can't say that it won't be because it's been going down the route of appeals, that could be -- it could be a 12- to 24-month resolution just depending on how long it takes us to get in front of a judge, an ALJ situation. So I guess the best last case, we could get some good results at reconsideration, which would be done soon. Worst case is we have to go to ALJ, and that's where we're testifying and talking about chart-by-chart and it could be a couple of years.

[Doug Cooper, MD & Head of Research]

Okay. Just moving on to the staffing initiative. Can you just sort of walk through what the margin profile might be? So you hire these people and then sort of bill them out by the hour to other companies? And maybe just walk through what it looks like.

[Casey Hoyt, CEO & Director]

Well, yes, in the -- with these contingency contracts, your typical staffing contracts where a hospital system uses them and then you bill -- or they bill -- you bill the hospital system per hour. That's one piece of the strategy for sure. And that's what we've been doing with these -- I use the number 300 nurses that we -- that we placed in the last year. The more important piece to us, Doug, and one that you'll understand is that we are beefing up our own internal recruiting platform to help find the people that we need here at Viemed to grow the organic growth engine. And so there'll be 2 ways that we bring value. What we're seeing the need for is that folks are without people, number one; but also, we want to get our people into the hospital facilities as well to where they can help direct traffic for the referral source and really hope -- educate folks on how to do business with Viemed more efficiently.

[Doug Cooper, MD & Head of Research]

Okay. And what is the process for recruiting these people? Are you going to sort of schools? Or what is the actual process?

[Casey Hoyt, CEO & Director]

That's definitely one tactic, but we can't give all of our secrets away on this call here, Doug. But yes, look, there's -- these guys are next-level recruiters that are proven. They've been doing this for many years, and we're bringing in other folks and training them how to efficiently do this.

[Doug Cooper, MD & Head of Research]

Okay. And just because of the labor shortage seemingly all around, do you see any upward pressure on wages?

[Casey Hoyt, CEO & Director]

Yes. I mean we're getting creative with a lot of our packages, but nothing that -- we're not going shaking or competing with these travel contracts that clinicians are getting with right now. So we're -- we've lost a handful of people, but nothing material enough to really talk about. The folks just traveling across country and go and make double the rate. That's not a reason for us to go out and increase our rate to retain those folks. We've already actually recruited some clinicians that have come back off of those contracts that are ready for a normal job again. So we don't predict that we're going to have to money with the problem that's going on right now.

[Doug Cooper, MD & Head of Research]

Okay. And my final one, just 12% growth year-over-year, obviously very good. your expectation is that you can maintain double-digit organic growth into next year?

[William Todd Zehnder, COO & Director]

Absolutely. We are hopeful while we can't say when it's going to happen. We are hopeful that we get back to more months like July, and it sets us up for more traditional growth rate. This was a great quarter. Having 6% sequential growth was great. It really started with a -- we got off to a bang and always getting out early in the quarter is going to set us up for good growth. So we're hopeful that we can start getting to that 5%, 6%, 7% sequential growth rate and start stacking those up on top of each other, which will yield more Viemed traditional organic growth rates.

[Operator]

And we have reached the end of the question-and-answer session, and this also concludes today's conference call. And you also may disconnect your lines at this time. Thank you for your participation, and have a good day.