Itamar Medical Ltd.
Q1 2021 Earnings Call Transcript

Published: 20 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Itamar Medical First Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to turn the conference over to your speaker today, Leigh Salvo of Investor Relations. Please go ahead.

[Leigh Salvo:]

Thank you. And thank you all for participating in today’s call. Earlier today, Itamar Medical released financial results for the quarter ended March 31, 2021. A copy of the press release is available on the company's website.

[Gilad Glick:]

Thank you, Leigh. Good afternoon everyone, and thank you for joining us for our first quarter 2021 conference call. I'm joined on the call today by Shy Basson, our CFO. Our first quarter was marked by strong topline performance, continued operational execution, and progress across each of our long term growth drivers. We were pleased to see the momentum from the latter half of 2020 continued into the first quarter enabling us to achieve record first quarter revenue of $12 million, representing a 43% year-over-year increase. Drilling down into the first quarter results a bit more. Demand for WatchPAT increased throughout the U.S., Europe and Japan despite continued impact from COVID restrictions, particularly in the earlier part of the quarter. Our U.S. core slipped business was once again the primary growth driver as home based care continued to drive adoption. Our WatchPAT ONE single use and smartphone connected test continue to drive practice workflow changes permanently and we saw test from our cardiology segment reached an all time high. WatchPAT revenues in the U.S. increased 38% year-over-year driven primarily by WatchPAT ONE and WatchPAT Direct. Total WatchPAT revenues increased by 33% year-over-year. Our non-IFRS gross margin was approximately 72%, a sequential improvement over the fourth quarter and in line with our expectations. Our continued growth margin improvement is largely due to the implementation of further cost reductions in design and production, mainly on the WatchPAT ONE. On that front, we are happy to share that in April we commence operations in our brand new state-of-the-art 15,000 square foot production facility in Caesarea which provides an additional layer of support towards our goal of approaching non-IFRS gross margins of approximately 75% by year end 2021. Overall demand for WatchPAT is increasing worldwide. Even as COVID restrictions began lifting, sales remain strong. In the recent third party survey, we conducted to determine the current dynamics of the sleep apnea diagnostic market results showed that home based testing was considered an appropriate alternative to PSG testing performed in sleep labs. Encouragingly, most clinicians surveyed indicated their belief that the recent shift from PSG to HSAT is here to stay, even after the pandemic is under control. Turning to our long term growth drivers, we've continued to make notable progress in the core sleep, cardiology, and international expansion segments. We have a number of new exciting catalysts on the horizon, and importantly, have a significantly strengthened balance sheet in place to support strategic initiatives designed to leverage these catalysts following the closing of a $50 million public offering earlier this year.

[Shy Basson:]

Thank you, Gilad. Revenue for the first three months ended March 31, 2021 was $12 million, a 43% increase from $8.4 million in the same period of the prior year. Growth was again mainly driven by the increase in WatchPAT sales in the U.S. and the increase in Japan in Europe. WatchPAT revenue was $10.9 million, an increase of 33% compared to the first quarter of 2020. U.S. WatchPAT revenue was $8.4 million, compared to $6.1 million in the first quarter of 2020 reflecting a 38% increase driven primarily by WatchPAT ONE, as well as WatchPAT Direct sales. Sales from disposable and renewable products, including WatchPAT ONE comprised approximately 79% of WatchPAT revenue in the U.S. compared to a approximately 75% in the first quarter of 2020. Turning our attention to the rest of the P&L for the first quarter of 2021, IFRS gross margin was 67% compared to 69% in the fourth quarter of 2020. Non-IFRS gross margin increased to 72% compared to 71% on the fourth quarter of 2020. Non-IFRS gross margin improvement was mainly attributed to the continuing decrease in WatchPAT ONE production cost. IFRS operating loss for the first quarter was $5.3 million compared to $2 million in the same quarter of the prior year. IFRS operating expenses include $1.1 million relating to non-recurring stock based compensation expenses resulting from the extension of the exercise period or vested service option terms from five to 10 years. Non-IFRS operating loss for the first quarter of 2021 was $2.8 million, compared to $1.4 million in the same quarter of the prior year. The increase in non-IFRS operating expenses was primary attributed to the following factors; selling and marketing expenses associated with the expansion of the U.S. sales team into new territories and verticals, and an increase in consulting fees relating to reimbursement in the U.S., Australia and Japan. An increase of approximately $500,000 in R&D expenses associated with Spry Technology development, and an increase in personnel to support for development, mainly related to our digital health platform, and general and administrative expenses, mainly associated with an increase in directors and officers insurance premiums, as well as increasing legal expenses, including commercial disputes in defense of intellectual property initiated by us. Net loss for the quarter was $5.5 million, compared to $2 million in the same period of the prior year. Non-IFRS net loss was $3 million compared to $1.4 million in the same quarter of the prior year. Non-IFRS loss for ADS was $0.20 compared to $0.11 in the same quarter of 2020. As of March 31 2021, we had cash and cash equivalents and short term bank deposits of $78.9 million. This includes net proceeds of $46.7 million from our public offering in February 2021.

[Operator:]

Your first question is coming from the line of Matthew O'Brien with Piper Sandler. Your line is open.

[Matthew O'Brien:]

I guess maybe Gilad for starters, on these headwinds that you mentioned, coming out from a material perspective, and then also onboarding, can you just talk about the level of those headwinds? Are they sounds like they're going to linger here in Q2 a little bit. Just talk a little bit about the magnitude of those headwinds, and then moving through that into the back half of the year?

[Gilad Glick:]

Right, first thank you very much, Matt, for joining us. Appreciate very much. The headwinds we describe our indices are not e-commerce specific. They're broader indeed in the electronic industry in general. I think most of you are familiar from many other companies. There is no impact to Itamar right now. But it's something we need to manage means we probably have to increase our long lead item inventory, because supply is not as predictable as it used to be. Stuff like this, shipping now, there is some increasing prices and world shortage in capacity again, we build volumes of our devices and the weight of our devices. It's not impacting us directly, but it's something we have to manage. That takes some more planning, take some more electing few vendors just to make sure we always have access to capacity. But none of them have actual impact on our company right now or something we can predict. But we have to be cautious about those global trends and recognize them.

[Matthew O'Brien:]

Okay, that's helpful. I guess what I'm really getting to as part of that question is, you left the guidance unchanged, just put up a really strong Q1, you're now guiding to kind of pulling back here a little bit up to I guess the Japan order, and everything. But if you just analyze what you're doing here and put a little bit of growth on that you're getting to that guidance range pretty quickly. So is it really that factor, just worried about some of the supply issues and the COVID issues just globally that are keeping the guidance range kind of where it is right now?

[Gilad Glick:]

Yes, we’re. The most important element is we still believe that the pandemic definitely in Europe, in Tokyo, as we heard and in some areas in the U.S. is still not under full control. While here where we sit in Israel, it's really, most of the population is vaccinated. That's not the situation worldwide. So we remain cautious. That's the first element, second element is Shy will indicate later on, Japan big order and the modest growth we expect from Japan year-over-year before we solve the AHI criteria problem is another factor we have to consider. And typically, we're cautious with our guidance, unless we have very strong indicator, and high confidence that we can do something different. We remain on the safe side.

[Matthew O'Brien:]

Okay. And then last question for me is just on, you're still onboarding a ton of new accounts, which is great to see and new customers. What have you seen from some folks that you were maybe adding kind of middle of last year as the pandemic was really breaking out, had those customers stayed with you, are they still growing with you or they starting to shift a little bit away to more the traditional PSG testing? Are you getting any hints of that? Or is this as you mentioned earlier from your survey, you feeling good that it's a very durable new customer base going forward they're going to keep using a lot more WatchPAT ONE in the future?

[Gilad Glick:]

Yes, definitely the latter. We're monitoring our numbers for our customers, for region, repeat orders. And what we've seen is that the WatchPAT 300 business came back to its pre-COVID level while the entire WatchPAT ONE business is incremental. Most of the customers that we onboarded remain in the reorder patterns. They're loyal to the products. Although as you mentioned, there is some relaxation around the access to healthcare facilities, it looks across the U.S. in literally vast majority of our territories, we see the same behavior and that's very encouraging for us.

[Operator:]

And our next question coming from the line of Josh Jennings with Cowen. Your line is open.

[Josh Jennings:]

Good morning, Gilad and Shy. Thanks for taking the questions. I wanted to ask I mean it’s great to see the momentum continue here into 2021 and new customer adds, still very strong. I was hoping to just get a little bit more detail on the new customer adds as we're now in the Q1 and into Q2, and just the mix that you're seeing from them, or are these new customers or as they onboard moving directly to WatchPAT ONE as most new customers were during the eye of the storm of the pandemic last year, and maybe you could share just some details or high level color on just the mix of WatchPAT ONE, WatchPAT Direct and WatchPAT 300 within the new customers that have been onboarded in 2021 so far?

[Gilad Glick:]

Shy, do you want to take this question?

[Shy Basson:]

Yes, the number of questions. First of all, Josh thank you for participating and making the call highly appreciated. The number that we’re disclosing is the number of WatchPAT ONE customers is a combination of existing customers and new customers that are joining Itamar, it's a blend. I’d say that roughly two-thirds are new to Itamar and about thirds are customers that are already within Itamar that are being are utilizing WatchPAT ONE on top or in parallel to their multi-used WatchPAT 300. The blend from the size of customers is I would say all the variation, you could see single physicians, whether sleep or dental or others to large corporations, the VA, a lot of facilities in the Kaiser of the world. And last, I would say and we've indicated in the script is that we have seen a large increase in utilization in the month of March, April, compared to the demands that we had earlier this year, in January and February. And this is where we are getting our encouragement also towards Q2, as we enter or in the middle of Q2. So we're seeing increasing utilization actually our customers using the WatchPAT ONE. Last I would say about WatchPAT Direct, WatchPAT Direct grew to a very significant portion, we’re conducting roughly I would say more than 3,000 tests a month on WatchPAT Direct and WatchPAT Direct, we’re conducting I would say basically a blend of 50%, 50% of the WatchPAT Direct we’re shipping are use devices and 50%, we’re shipping WatchPAT ONE devices and the segment is growing is the fastest growing segment with WatchPAT ONE and Itamar Medical.

[Josh Jennings:]

Thanks for those details, Shy. A follow-up on wanted to try -- just on the cardiology channel, I wanted to try and understand kind of where you sit today. I mean, our view or our understanding was that the pandemic really opened up the core sleep channel more fully that was taking up a lot of time for the Salesforce. And it seems like that's probably continued into with the surges through the end of last year and the beginning of this year. But just was hoping for a status update on where you feel Itamar is positioned in the cardiology channel, I mean how early it is. And is it right to kind of to think about the cardiology channel is it's still very, very early innings for Itamar and with this layer of growth coming on as we move through 2021, but even more so in 2022 and 2023?

[Shy Basson:]

Yes, so this is a great question. What we've seen is exactly what you described, we've seen the cardiology test in the last few months reaching all time high and we reported a significant all time high. No, not just a little bit. I'm talking double-digit in percentage versus everything we've seen before, cardiology offices are opened definitely, I think some of the discussions around post-COVID cardiovascular complication, if you will, or post-COVID-19 cardiovascular stress is very present in the cardiovascular circles. And sleep apnea is a risk factor that actually mechanically impose more stress on the heart, both mechanical stress as well as electrical stress is definitely in the awareness of the doctors. We've conducted multiple webinars, advisory boards, they're fully attended, we see new offices opened up. And again, the most important we see number of cardiology tests surging in the last few months with April being really, by far an all-time high for us.

[Josh Jennings:]

Great, and maybe just one last question, you comment on the pipeline and some products, you'll be introducing in the Sleep conference coming up here in a couple of weeks. You talked about multi-night version WatchPAT ONE, I was hoping to just get some more color on that. And this sounds like multi-night monitoring to determine night to night variability in certain indexes or metrics, maybe talk about pricing, and just any other details, you can share pricing, how this will fit into the portfolio, and then how will be used in the sleep channel? Thanks a lot.

[Gilad Glick:]

Yes, thank you, Josh very much. So yes, we've invested since the beginning of the pandemic in a host of extension, line extensions to the WatchPAT products that we've realized this is a response to what we have seen in the market. So for example, I would say in order of priority, the most exciting product we're going to launch with sleep is turning the app on the Smartphone from WatchPAT ONE that so far have been a passive transmitter of data back to the cloud and the backend into a active communication tool with the patients based on public kind of popular demand from the sleep doctors to survey the patients around their subjective situation prior to taking the test, have they consume alcohol, how they slept last night, have they taken a nap and how they feel the morning after if there is a presence of insomnia. For example, that's something we can survey which is validated questionnaire in an interactive graphically easy to use fashion, that today is being done by shipping a bunch of papers to the patients or asking them to come fill it in, in the clinic, which not it's not possible. And then integrating all those questions directly and automatically in a graphic fashion into the sleep report. This is really exciting. This is one example. Another example is to enabling to your point multi-night variability. But it stems from the WatchPAT ONE understanding for example, so far in the world of sleep, you've given a device to a patient, it was returned after a week or two, then you take a week or two to look at the results, with WatchPAT ONE the results are available the morning of five minutes after the patient wakes up practically, if there is questions about a follow-up night, a doctor can ask the patient to conduct a second night test, for example, by sleeping on their back, or sleeping on their side, something that wasn't possible until now, not in PSG, nor at home. So this is the whole development. We call it kind of look beyond AHI, about how our technology in particular WatchONE technology that was developed and became popular in the last 18 months is enabling new innovation that was not even possible to think of 18 months ago.

[Operator:]

And our next question coming from the line of Richard Newitter with SVB Leerink. Your line is open.

[Richard Newitter:]

So wanted to just start-off with the comments around the second quarter and make sure I'm understanding so Gilad, you're not seeing any impact from the supply considerations that you described as of yet. And you're basically just calling out some caution, just in case, I guess we're halfway through, we're more than halfway through the second quarter. Has there been any sign at all and were your comments specific that there was no impact to the first quarter but you're starting to see some in the second quarter or you haven't seen anything in the first quarter or second quarter to-date and this is all just to be cautious because you do think and be prepared for any disruption that may occur. And my second question to that is if it's still out in front, I guess what gives you confidence that that would be a second quarter issue only? And that it would bounce back or self correct by the back half? Thanks.

[Gilad Glick:]

No, great question. We thank you again, thank you for calling into the call today, no impact whatsoever as of now on the company zero, just to be very, very clear, we have not had any supply challenges at all. And we don't anticipate any supply challenges that we can think of what we've done though, we're recognizing those global trends, we're hearing about them from our suppliers and from our board, we've seen so many other companies that are technology hi-tech mostly in those kind of industries. So what we've done, and we want to reassure the street, that we've taken appropriate actions to what we could to, in advance and proactively mitigate those risks by buying bigger inventory of long-lead items for example, that impact our inventory on the balance sheet, you will see actually, you can see it on our report, our balance sheet on inventory have grown sizably. But that in response to those kinds of risks, but no actual or something we can see that will impact Q1 or Q2 or any future quarters, as far as we can tell.

[Richard Newitter:]

Okay, I guess that helps on the balance sheet dynamic, but just from a revenue and a top line standpoint, I'm just trying to make sure that there's no change in underlying demand. And if the supply issues or things that you're getting ahead of to Matt’s question earlier, just the guidance would seem to imply some conservatism, which is okay, it's early in the year. But is that what we're looking at just some conservatism on the top line, and you're expecting relatively minimal top line impacts and the ability to satisfy all demand if it materializes?

[Gilad Glick:]

Yes, as far as we can see now, no impact on top line whatsoever, 100% of the conservatism in the top line is to do with market conditions in particular COVID. That's the one we're worried about and stay conservative, because in our view, is not 100% under control, we do not anticipate any impact on top line because of supply issues whatsoever really could not stress it enough. And we're just again meeting, recognizing those potential challenges and telling the street we're mitigating them. And the price we pay is a little bit thicker balance sheet item on the inventory level.

[Richard Newitter:]

Helpful, one more if I could, just you've given some outlooks. I know you've mentioned in references surveys, you've given your outlook on where you think the HSA portion of the market is going to be headed and where we’re now relative to in-lab. I'm just curious if you could share kind of what the share is of HSA today. And any changes to kind of where you think that settles out now that we’re starting to in fact actually be on the other side of the pandemic?

[Gilad Glick:]

Right, yes. Obviously, we have the 2019 numbers, our share was 24.5 rough numbers percent. Given all the growth we've seen and what we surveyed the market, we estimate just to be very clear, we don't know the share yet, because claims data has not been reported for 2020. That's coming in July, August timeframe. But from all the triangulation, we’re estimating our share have increased in the HST space to again, this is a rough estimate to maybe 10, 15 points more than that. So 35% to 40% market share, we can be wrong here. So when the numbers will come, we'll report them but that's our best estimate right now. We see no change in our broad customer base when it comes to in-lab PSG versus HST, those that converted stay with HST, those that open new HST programs remain with them. We have not seen an increase in PSG activities in the last few months, as far as our customers can tell us, so we think that our market share gain is still holding. We still believe that in 2020 was a decrease in the overall HST market, right, we reported that maybe 200,000, 300,000 tests less because the overall impact, so our share is based from growing our business and a little bit shrinkage of the overall market. But that's kind of the numbers, none of them is validated, so please use it with caution, I cannot stress it enough.

[Richard Newitter:]

But you still feel like 50

[Gilad Glick:]

Yes, I believe that as long as PSG reimbursement is still that lucrative, and CMS will not revise PSG reimbursement down, it probably will remain in the 50

[Operator:]

And our next question coming from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

[Jeffrey Cohen:]

So could you talk about the U.S. Commercial team in your commentary going to 43%, does that increased somewhat linearly throughout the year and are you seeing that that'll be at specific territories and can you discuss a little bit about some strengths and weaknesses as far as geographical breakdown, at least domestically here? Thank you.

[Gilad Glick:]

Shy, do you want to take the first half of the question. I'll answer the second.

[Shy Basson:]

Yes, again Jeff, thank you for calling in and participating in our call. As we said earlier this year, our goal is to increase the U.S. by at least approximately 10 territories, we did it in the first quarter, we’re in shape to add about four or five in the second quarter, we are doing this, I must say and we said it on the script that the onboarding state of the pandemic is here and still travel in Q1 was not that efficient, onboarding processes took a bit longer. But we were seeing that and we are onboarding the people. And it's something we've said on the script. So from expansion on the domestic front.

[Gilad Glick:]

Right from strength geographically in the U.S., we've seen our largest customer Kaiser rebounding to pre-COVID levels. Growth is there again definitely if you consider the March weakness last year, this year we see none of that. So really nice growth. We have great, we've seen some of our new territories like Charleston, have reached already our target of $1 million and this is amazing for us after four months, other areas, traditional areas like Atlanta and others are very strong, New York. So we see very strong demand overall, our traditional areas of weakness remain the Northeast Boston area, we have reimbursement challenges there, which been there traditionally, but other than that the entire rest of the country, East West, we have great markets to operate from.

[Jeffrey Cohen:]

And then second for me. Could you talk about any presentations of note coming from the Street conference and then talk a little bit about multi-use and the Spry Loop solution. And as far as chronic versus systemic, how should we think about that and how should the peers in CMS think about that as far as you having offering a solution, which is used periodically or moderately permanently on a short-term basis for patients? Thank you.

[Gilad Glick:]

Right, so I want to frame the question. Those are of course very, very important questions. First is, we as a company, we understand that sleep apnea, traditionally is a one night test, because that's how in-lab test works, but it's not how the physiology works, right. The physiology is the things impact your sleep, all of us are exposed to sleep, right, every person we know that not all nights are the same, some nights you sleep better than others for many, many reasons by the way, not only sleep apnea and there is a tendency to move from a one night test which was traditionally what could happen to a longer period of testing and monitoring because that's how life is and CMS is not I don't think they've indicated any recognition of it, but the literature does, and our customer do. So we’re moving from one night to offer as I mentioned what we call it an enabled multi-night test, so if the first night didn't, didn't give the doctors all the answers, they can enable a second night very easy with WatchPAT ONE just by asking the patient to plug the second probe on the same WatchPAT ONE device it’s still very safe because no exposure between patients, and they can have a second night in which those questions will be answered. But our real vision is to continuously monitor the patients, we know today very clearly that sleep apps are not being weared in most cases the entire night. The patient remove their masks halfway through the night or three quarters through the night. So doctors don't have a full picture. Some patients wear medical devices, they’re becoming very popular now. There is no way to monitor how they're doing, right. All the neuromodulation business that is now Spry's and others, there are a lot of questions about how effective stuff like this. So Spry will give the answer, it’s not obviously ready today, something we're investing in building and will be available in 2022. But that's kind of for me, that's directionally, where we want to lead the market, just like the ECG market move from a single test to 24 hours to continuous monitoring and up to implantable Loop recorders. The same for glucose monitoring, from one or twice a day into continuous monitoring. We want to make a revolution in testing that direction. And that's what Spry acquisition will hopefully give us, the progress with Spry is good. I'm very pleased. We actually visited them last week in-person in San Francisco, Shy and myself and the R&D team. We sat few days with them, not by Zoom. And that was great to see. And we've interacted with brainstorms, and we really my confidence in that acquisition is very strong.

[Operator:]

Our next question coming from the line of Ben Haynor with Alliance Global Partners. Your line is open.

[Ben Haynor:]

Thanks for taking the questions. First off for me just kind of following-up on the market share gains that you've seen, can you talk a little bit about, who you guys are gaining against, anything of note on that front?

[Gilad Glick:]

I don't know that I can name the particular company, but we're definitely gaining from the reusable business. In the beginning, some of it was our own right, self cannibalization. Now we've done self cannibalizing, and we see the game coming 100% from other airflow type system, but it's generally coming from all those reusable airflow based systems because A, as to transmit them from or transfer them I’m sorry from patient to patient to patient, which pose contamination and infection risks. But moreover, those airflow based system have tubes that are connected to the nasal cannulas and have air and other body fluids touching them. And while there is possibility to clean them, it’s always a little risky. And single use being really the dominant single use, it’s not the only single use device on the market that that is clinically used with good sleep doctors position WatchPAT ONE as really the only option. So and that's where we're taking our share from.

[Ben Haynor:]

Okay, fair enough. And then secondly, I guess lastly from me, thanks for the color there on Spry Health, but I know last quarter, you talked a little bit more about identifying opportunities for inorganic growth. Is there anything that we should expect on that front? Any conversations that you had or just any additional color that you might have on kind of the M&A activity that strategy that you’ve talked about recently?

[Gilad Glick:]

Yes, great question. We're constantly evaluating options for inorganic growth, we believe the time is right for accelerating our growth beyond what we can do by adding just by adding more reps and territories. There is multiple options we're working on. They're all alongside our strategic initiatives that we're reporting on a regular basis everything from how to generate more patients into the pipeline, and then how to make more revenues once the patient is in the care pathway. And of course, for obvious reason, I cannot name particular names, but we're constantly evaluating good options.

[Operator:]

I'm showing no further questions at this time. I’d now like to turn the conference back over to Gilad Glick for any closing remarks.

[Gilad Glick:]

Thank you very much. I want to thank everybody that joined the call today. I want to thank Itamar employees across the world that are making tremendous efforts to continue to support our customers and their patients in those uncertain times. And I want to special thank our Israeli employees that under the really unusual circumstances that Israel experienced in the last week have shown great leadership and continue to operate our business as if there is really nothing happened. So I want to thank everybody and appreciate your support.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.