STRATA Skin Sciences, Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Greetings, and welcome to STRATA Skin Sciences First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leigh Salvo, Investor Relations for STRATA Skin Sciences. Thank you. You may begin.

[Leigh Salvo:]

Thank you and good afternoon, everyone. Joining me today are Bob Moccia, CEO; and Matt Hill, Chief Financial Officer. Earlier today, STRATA released financial results for the quarter ended March 31, 2021. A copy of the press release is available on the company's Web site.

[Robert Moccia:]

Thanks, Leigh. Good afternoon everyone and thank you for joining us for our first quarter 2021 earnings call. We had a disappointing first quarter of 2021 in that we reported total revenue of 5.8 million, of which recurring revenue was 4.7 million, a 17.9% decrease over the first quarter in 2020. There were several contributing factors to this decline, the first of which was continued impact of the pandemic, especially early in the quarter, as dermatology offices remained understaffed, in many regions restrictions remained in place and patients were reluctant to seek treatment. In addition, we experienced an unfavorable swing of 800,000 in deferred revenues in Q1 2021 as compared to the first quarter of 2020. Our international business was impacted due to a deliberate strategic transition from capital equipment sales to a revenue model that is a combination of capital equipment sales and recurring revenue. We exited the first quarter with installed base at 871 recurring revenue extract devices, including 837 in the U.S. and 34 international placements, 30 of which have been placed in South Korea and four in Japan. This is up from 860 units at the end of December but lower than our initial expectations. In addition, six China placements shipped at the end of Q1 failed to make the deadline in time to be counted in the first quarter numbers, but will be recognized in the second quarter. Despite a slow start to the first quarter, improved patient visits in March that continued into the second quarter, combined with pent-up demand from new patients resulting in dermatology offices ramping up to more normal staffing levels is encouraging. RDX charts, which indicate patients seeking reimbursement for extract treatments, largely driven by our direct consumer advertising, which we started in Q4 2020 are reaching pre-COVID levels. We perceive this as a good indicator that new and returning patients are once again seeking out treatment from their dermatologists. Since our last update in March, I have spent considerable time in the field to meet with our customers, our territory managers, and key opinion leaders. Additionally, we conducted our first advisory meeting with key customers to best assess our current market position, potential to grow our business and devise a path to improve stakeholder value. These meetings have been very enlightening and have left me even more excited about the opportunities ahead. XTRAC remains an invaluable asset in dermatologist treatment of psoriasis, atopic dermatitis and vitiligo. Patients take comfort in the fact that this therapy is drug free, steroid free, painless and reimbursed by insurance. Dermatologists prescribe it because the effective, efficient treatments provide their patients with quick visible improvement, relief from painful persistent itch, and is a safe alternative with lower risk of side effects than biologic and topical treatments.

[Matthew Hill:]

Thank you, Bob. As mentioned, revenues for the first quarter of 2021 were $5.8 million, a 13.4% decrease as compared to revenues of $6.7 million for the first quarter of 2020, reflecting the continued impact of the pandemic, especially early in the quarter, particularly in the Northeast, as dermatology offices remained understaffed, restrictions remained in place, and patients were reluctant to seek treatment, as well as the unfavorable impact of $800,000 in deferred revenue as compared to the first quarter of 2020, and the timing of certain orders and placements, as we transition our international business from capital sales to a combined equipment and recurring revenue model. First quarter revenue also reflected a step down in revenue from the fourth quarter of 2020 as patient insurances reset in the beginning of each year. Recurring revenues were $4.7 million, a 17.9% decrease compared to $5.7 million for the first quarter of 2020. In addition to the above noted impacts on the revenue, recurring revenue was also impacted by lower DTC spend in 2020 included in COVID related cost reductions. Equipment revenues were $1.1 million, an increase of 10.4% as compared to $1 million for the first quarter of 2020.

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. . Our first question comes from the line of Joe Pantginis with H.C. Wainwright. Please proceed with your question.

[Joseph Pantginis:]

Hi, guys. Good afternoon. Thanks for taking the question. A couple of questions. Obviously, a lot of things are out of your control because of COVID and some of the things you talked about with regard to deferred revenue. So I'm going to ask something a little differently. Obviously, you've talked about the Northeast being a little choppy and there's some territories that still remain choppy because of the pandemic. Have any territories outperformed your expectations?

[Robert Moccia:]

That's a good question, Joe. This is Bob. The West and the Midwest have seemed to be recovering a little bit quicker than the Northeast. And the Southeast is also a little bit slow, but we are seeing improvement, especially on the West Coast and in the heart of the country at this point. I think with the Northeast, a combination of a couple of things based on the input I got from dermatologists that I spoke to, weather. There was a lot of bad weather as you probably remember in the Northeast in February. And secondly, just elderly patients in particular not wanting to go out into derms offices and two times a week for several weeks based on the fact that COVID was pretty rapid back then and there was still restrictions in place. That's why we think the Northeast is a little slower coming back, but we’re encouraged by what's happening with our RDX charts and seeing more improvement.

[Joseph Pantginis:]

That's fair. Thanks. And then when you guys talk about the pent-up demand, because obviously there are patients that would certainly want to get back to the clinic to get XTRAC treatments. So I guess when you talk about your -- what you would like from a projection standpoint, as you said to get to pre-COVID levels by year end, how do you see some of this pent-up demand or backlog being able to work through it? Like how quickly do you think you could work through it?

[Robert Moccia:]

Yes, I think it's really a function of the derm offices themselves. And again, we're encouraged that they're opening up and seeing more patients. Again, the feedback that I got from dermatologists that I spoke to is that staffing was an issue earlier in the year, but they are having a lot better success in getting staffing back up to a norm. So once that's in place, I would expect that the patients will start to flow in. That's why we really want to focus on increasing our direct-to-consumer advertising. We want to drive more patients into the derms offices. Our high volume customers, of course, are critical. They dropped off just like everybody else. But clearly if we can get them back to functioning at a high level, they can produce or treat a number of patients very quickly. And then we had about 20% of our accounts that just generated no revenue for us in the first quarter. So if we can get them up and running, that creates also capacity. So I think the capacity is there. It's a matter of getting the patients feeling comfortable going into the derm offices, and us helping drive them to them for treatment.

[Joseph Pantginis:]

That's great. Thanks a lot, guys. It's nice to see all the background activities prepping for the new markets, if you will. Thanks a lot.

[Robert Moccia:]

Thanks, Joe. Have a great day.

[Operator:]

Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

[Jeffrey Cohen:]

Hi, Bob and Matt. How are you?

[Robert Moccia:]

Good, Jeff. How are you doing?

[Jeffrey Cohen:]

Just fine. So firstly, could you give us a breakdown of U.S. and international just on the top line?

[Robert Moccia:]

Yes, absolutely. Domestic revenues for the three months ended March 31, 2021 were $4.7 million and internationally were $1.1 million.

[Jeffrey Cohen:]

Okay, I got it. So that was a similar breakdown to recurring and equipment.

[Robert Moccia:]

Absolutely, 4.7 in recurring and 1.1 in equipment.

[Jeffrey Cohen:]

Okay, got it. Can you reconcile some of your comments on – so six units for China, which arguably sounds like they will hit in the second quarter. And then kind of correlate that with the deferred revenue number, which I'm assuming is mostly or all U.S. So what amount of that gets pulled through into the second quarter or it gets pulled off in the second quarter as well?

[Robert Moccia:]

That's a great question. When we look at the deferred revenue, Jeff, it really comes around with what comes in from last quarter into this quarter. So the difference coming into Q1 of 2021 as compared to '20 was $0.5 million. So day one, we started Q1 '21 $0.5 million behind last quarter’s. And now leaving Q1 into Q2, we have an additional $300,000 coming out of Q1 into Q2 '21. So that sets us up better for Q2, especially as compared to Q2 last year where we only had $1.5 million coming in. Did that cover your question?

[Jeffrey Cohen:]

Yes. So it sounded like 300. Does that include or exclude the six units for China? And I'm assuming they are a combination of capital recurring through your distribution model.

[Robert Moccia:]

Yes, absolutely. So to be specific, we had four units to Japan, which was about $400,000 that shipped too late for Q1. And then we had six placements, and when we refer to placements that's when we're talking about is recurring revenue model that will show up in our installed base come next quarter. So it was a combination of Japan and China. China was placements and Japan was actual equipment sales.

[Jeffrey Cohen:]

Okay. So the 400 from Japan and the 300 in the deferred revenue to bump Q2 by those two amounts potentially.

[Robert Moccia:]

As compared to last year. And based on the timing of the orders, we expect to see a bump in equipment sales in Q2. But our equipment sales can be, which is why we're trying to move away from it, is they can be choppy.

[Jeffrey Cohen:]

Got it. And can you talk about the commercial organization now end of year, how many FTUs and where does that stand now? And what would you expect for the balance of '21?

[Robert Moccia:]

Sure. So we have 28 territories currently, Jeff. I would anticipate that we will add some additional people to the sales force, and I'll tell you why. We have, as you can imagine, very big territories, a lot of windshield time and I'm a big fan of frequency. In other words, getting into the accounts on a regular basis every other week if possible. So I'd like to cut down on those large territories. And what I plan on doing is a realignment exercise where we'll make sure that we have coverage in the best possible places on a geographic basis. And that will determine how many people that we may need to add, so I don't see it being dramatic. But there could be some additional bodies in the sales force, which I think will improve our opportunities for growth. And then from a marketing standpoint, we may look to bring on a marketer who has some derm experience in direct marketing to dermatologists. You've heard me say before. I think the company's done an outstanding job with their direct-to-consumer advertising program. But one thing I think where we can improve is marketing directly to the dermatologist or the provider, and I think that's a place I'd like to shore us up a little bit.

[Jeffrey Cohen:]

Okay. And then any commentary on product developments. You made a couple of references to that in both your script as well as the documents you filed. So could you talk about product developments for the quarter? Is it new products, new devices, new recurring models, et cetera?

[Robert Moccia:]

Yes, so a couple of things. So I think there's opportunities for indications. I think the vitiligo indication is undercapitalized by us at this point, and I think there's an opportunity there. I'd like to see us relaunch in vitiligo. We have good clinical data behind it. As you know, there are some new topical treatments coming for vitiligo here in the second half of the year from some big pharma organizations. Those treatments will get a lot of noise. They're very expensive. It needs to be seen how effective they are, but they have side effects. So I think that we certainly remain a good alternative to any topical or oral treatment for vitiligo. And I want to make sure the derms are aware of that. There are other indications that the excimer laser is used for that we can't talk about, it gets used off label, and we want to explore if those indications are things that we could add to our 510(k). So those are some of the development areas that we're looking at, as well as improvements to the current XTRAC. The company has done a good job in improving the technology and I think there's some opportunities there as well as we move into the latter part of the year.

[Jeffrey Cohen:]

Got it. And then lastly for me, Matt, any commentary on margins. I know they were about 220 basis points ahead of what we estimated. But is that going to be affected by mix or is that a current level that you're feeling good about maintaining going forward?

[Matthew Hill:]

Overall, margins are -- what's great about coming to this company and seeing the recurring revenue model executed well, pre-COVID and now looking to reengage and drive the recurring revenue utilization through our partner clinics. The fact that the margins accelerate once you get above the breakeven on the placements, so we get up into the low 90s percent margin. So it will greatly be affected by the growing recurring revenue, specifically domestically.

[Jeffrey Cohen:]

Okay, got it. Thanks for the readout. I appreciate the commentary.

[Robert Moccia:]

My pleasure. Good talking to you, Jeff.

[Matthew Hill:]

Thanks, Jeff.

[Operator:]

Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

[Suraj Kalia:]

Hi, Bob and Matt. Can you hear me all right?

[Robert Moccia:]

Absolutely.

[Matthew Hill:]

Yes.

[Suraj Kalia:]

Thank you. Perfect. So, Bob, first and foremost, I got some numbers on the call. So 15% of accounts do about 40% of the revenues, Bob. I was wondering if you could tell us are these revenues from higher sessions per patient or are they from the higher overall patients? I guess what is the secret to their success based on what you have seen and how translatable are these?

[Robert Moccia:]

Yes, that's a good question, Suraj. It really is a factor of volume. Our highest producing accounts move more patients through their offices. And they're probably -- in my estimation, they're probably more successful in making sure the patients complete a complete course of therapy. So by that alone, they're going to give more treatments. So 120 is where we were in the first quarter. And just for comparison, in 2019 we're at 220 of top accounts. So we got some work ahead of us to get our numbers back up to where they were in 2019 with these high volume customers, and they are an absolute priority for us. The sales force has got marching orders to increase their frequency there and to do anything they can to drive patients in and improve their efficiency. So they're very important to us. And we think we can turn that around with just some good back to basics blocking and tackling.

[Suraj Kalia:]

Got it. Bob, DTC has been repeatedly cited as one of the drivers for growth. I'm not sure if it has a one-is-to-one correlation, but a pretty strong or squared to top line growth. Long term, Bob, how do you look at leverage ability in this model? That is one part of the question. The second part, Bob, to piggyback on the vitiligo comments you made, we all know the JAK inhibitors are coming shortly, right, and you use them on vitiligo. Would that be introducing a new product to go head to head with -- I shouldn’t say head to head, but there will be some level of crowding in, right? Would this be the best spend of money at this time in your view? We'd love to get your expertise and thoughts behind that?

[Robert Moccia:]

Sure. So I think the direct-to-consumer model that the company has run for last several years obviously has been very, very successful. And if you just look at the history, and Matt has more insight on it than I do, but just from what I've been able to gather, when the spend was increased by the company in direct-to-consumer advertising, the number of visits or appointments made for the treatment by XTRAC increased. So I certainly think that that's something that we want to continue to invest in. As I said, I think the company's done a great job. I think where we can improve is our marketing directly to dermatologists. Because ultimately, the dermatologist is the one who's making the decision. And if we want to expand usage, which is one of the goals that we have in 2021 and beyond, then we need to make sure that XTRAC is top of mind when a psoriasis patient comes in to that office, not just because we sent them in from direct-to-consumer advertising, but the halo effect that we generate by sending patients in who ask for XTRAC, who come back to the dermatologist and praise the treatment and how much they liked it, and the interactions I've had in the last couple of months with derms, the feedback has been that it's an effective treatment that patients like it. As we mentioned, painless, drug free. It treats their itch very quickly. All these things are very positive and reinforcing for their usage of XTRAC. So from that perspective, I think the direct-to-consumer advertising is important, and we'll continue to do that. With regards to vitiligo, my experience Suraj has been whenever a new drug comes into the market, in an indication such as vitiligo that does not have a lot of choices for treatment. And right now there really aren't many choices, any dermatologists will tell you that and laser is one of the few things that is actually approved for it, the noise level is going to go up dramatically. And what will happen is, as you know, patients who haven't sought treatment a long time are going to come in to the dermatologist to get treatment. And not everyone is going to be a candidate for a JAK for a number of reasons; the cost, they're going to have maybe some difficulty with reimbursement, the effectiveness is suspect in some ways with certain patients, and it's an immunosuppressant. And right now, a lot of patients don't want to take immunosuppressants because of COVID. So I think that we are in a really good opportunity to be there as an alternative to these topicals or oral JAKs as a treatment that's proven, it's safe, it's effective, and it's cost effective for the patient, and it's a revenue generated for the doctor. So I do think it's an opportunity for us that I do want to focus on and capitalize on. We know who the KOLs are in vitiligo. We’ll get them to the podium talking about our treatment. And I think we can capitalize on that opportunity.

[Suraj Kalia:]

Got it. Finally, Bob, could you give us the status on MMD in the field? Has there been a shift in total number of sessions per patient with use of MMD? Any color there would be greatly appreciated? Gentlemen, thank you for taking my questions.

[Robert Moccia:]

Sure. Thank you. Not a real shift that we haven't seen. I think partially because of COVID. Maybe the MMD has not got the attention it might have got if we weren't in a COVID situation. So we have not seen a shift in the number of treatments to this point because of that. And it is potentially an opportunity for those patients who don't want to go through the full course. But certainly, there are a number of patients and providers for that matter, who do like to treat the full course of XTRAC therapy. So it’s hard to say if that's going to change going forward. But we'll keep an eye on that.

[Suraj Kalia:]

Thank you.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Bob Moccia for closing remarks.

[Robert Moccia:]

Thank you, operator. I’d just like to thank everyone for joining us today and hope everyone stays safe and healthy going forward. And I look forward to speaking to you on the next call. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.