Vapotherm, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Vapotherm, Inc. Fourth Quarter and Fiscal Year 2020 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host, Mr. Mark Klausner. Thank you. Please go ahead, sir.

[Mark Klausner:]

Good afternoon and thank you for joining us for the Vapotherm Fourth Quarter 2020 Financial Results Conference Call. Joining us on today’s call are Vapotherm’s President and Chief Executive Officer, Joe Army; and its Senior Vice President and Chief Financial Officer, John Landry.

[Joseph Army:]

Good afternoon and thank you for joining us today. I will begin by discussing our fourth quarter results and full year 2020 accomplishments. Then, John Landry, our CFO, will provide the financial update of our fourth quarter results. I will then update you on our key areas of focus for 2021, before taking questions. 4Q was another strong quarter from Vapotherm. We generated $40.9 million in revenue, a 214% increase over 4Q 2019. Increased our worldwide installed base by more than 3,800 units to 28,650 units, and are now in over 450 Gold and Silver ED accounts, which are the top 2000 emergency department hospitals in the U.S. as measured by respiratory discharges. In addition, we printed a 50.6% gross margin for the quarter. Before digging too deep into our fourth quarter performance, I would like to take a step back and discuss the significant progress we made as a company in 2020. This past year was transformational for Vapotherm, and I believe our accomplishments are best understood with a longer-term perspective.

[John Landry:]

Thank you, Joe. As mentioned revenue in the fourth quarter of 2020 was $40.9 million, representing a 214% increase over revenue of $13 million in the fourth quarter of 2019 or the prior year. U.S. revenue was $33.6 million, an increase of $23.8 million or 242% over the prior year, while international revenue was $7.3 million, an increase of $4.1 million or 129% over the prior year. Our worldwide installed base grew by approximately 12,100 PF units in 2020, including 4 quarters growth of approximately 3,800 PF units. As of the end of the fourth quarter, our worldwide installed base consisted of 28,650 PF units, reflecting 73% year-over-year growth. Our monthly U.S. disposable utilization rate for the fourth quarter of 2020 was 2.43 as compared to 2.09 in the prior year. This is the fourth quarter in a row where our U.S. disposable utilization rate exceeded our historical experience, but at least 0.25 turns per month. We believe this increase in U.S. disposable utilization rates in the quarter was largely due to the increased usage of our technology for the treatment of respiratory distress experienced by many COVID-19 patients. Given a significant increase in the installed base, we believe that utilization rates will be lower than historical averages until the significant number of newly installed PF units becomes productive. U.S. disposable average selling prices increased over prior year due to the continued uptake of the ProSoft nasal cannula, and aerosolized disposable patient circuit, both of which were launched in the first quarter of 2020. The monthly international disposable utilization rate for the fourth quarter of 2020 was 1.67 as compared to 1.69 in the prior year. Recall that we use a distributor network internationally which results in slightly lumpier disposable utilization rates. Gross profit in the fourth quarter of 2020 was $20.7 million, an increase of $14.8 million over gross profit of $5.9 million in the prior year. Gross margin was 50.6% in the fourth quarter of 2020 compared to 45.1% in the prior year. We improved gross margin faster than anticipated due to improved overhead absorption and a higher mix of U.S. revenue. Recall, we significantly increased our production volume beginning late in the first quarter of 2020 to meet increased customer demand for our products, especially capital equipment.

[Joseph Army:]

Thanks, John. Before opening the line for questions, I’d like to review our objectives for 2021 which are as follows

[Operator:]

Our first question is from the line of Bob Hopkins from Bank of America. Your line is now open.

[Brad Bauer:]

Hi, there. Brad Bauer is on for Bob today. Thanks for taking our questions. Just a couple for me. I just want to kind of think, make sure I’m thinking about guidance in the right way. So we have the Q1 guide. And then, it looks to me like if you take the disposables run rate as it kind of exists, we’re looking at capital sales, maybe only slightly above what we had in 2019. Would you think of it as sort of a conservative estimate for the capital sales? And it seems like it’s a pretty steep drop off from Q1 to Q2. So just kind of want to make sure I’m thinking about that right.

[John Landry:]

Yeah, hi, Brad. It’s John from Vapotherm here. So let me touch-base on the guidance. And I’ll do it in a couple of chunks if that’s okay. First, I’ll take a look at 2021 in total. And what we’re thinking about is if you recall historically, were generally a 75/25 split, and that’s generally 75% U.S. revenue, 25% international, and the same with recurring revenue versus capital and service. So, as we think about the business this year, as COVID starts to subside, and move away from us, we’d expect that to continue for us here in 2021 and beyond. So the other item is with regard to the quarter specifically. What we’re seeing here in the first quarter is, unlike that 25% or so from capital and service, we are seeing a little bit higher capital contribution in the first quarter than that typical 25% split. So we’re thinking more in the 35% to 40% split with the balance coming from recurring revenue stream. And with capital as I mentioned in my remarks, we expect budgets for hospitals to decrease over the course of the year. So the lion’s share or 70%-ish percent or so of the capital equipment revenue we’d expect to have booked in the first quarter. And in the first quarter, given the strength we’ve seen internationally, we expect it to be a little bit higher than the 25% we’ve typically seen, maybe more in the 30%, 33% range. So that’s how we’re thinking about the guidance based on what we’re seeing in the marketplace right now. And and how we’re thinking about capital revenue and recurring revenue streams going forward here in 2021 and near-term into Q1.

[Brad Bauer:]

Got it, that’s helpful. And then, just one quick follow-up. Is HVT 2.0, is that launch contemplated in your guidance and do you expect it to be a meaningful contributor in 2021? Thank you.

[John Landry:]

Sure, Brad. So we have very minor revenue in here for 2021 from HVT 2.0. It’s more of a 2022 revenue contributor than 2021.

[Brad Bauer:]

Thank you.

[John Landry:]

You’re welcome.

[Operator:]

We have our next question from Margaret Kaczor from William Blair. Your line is now open. Again, Margaret Kaczor, your line is now open.

[Margaret Kaczor:]

Oh, sorry about that. I was on mute. Hopefully you guys can hear me now. So first off, thanks for providing the guidance. I know it’s a little tough for you guys, given the recent ebbs and flows of demand. But I’m going to take a second crack at just understanding a little bit more of what you guys are implying. So, yeah, if I ran some of the numbers through our model, given what’s implied in Q1 and some of your commentary around systems and consumables for Q2 to Q4, does that get capital unit sales that are maybe below the quarterly 2018 and 2019 rates? And then, would that be a good base to assume for 2022? Or is that not accounting maybe for the leases versus the outright sales?

[John Landry:]

Hi, Margaret. Thanks for joining today. Just in terms of the capital equipment revenue, we’d expect that over the course of 2021 to be slightly higher than what we’ve seen in prior pre-COVID types of levels, 2019 and prior. So that’s how we’re thinking about it for 2021 and beyond and really the big driver of our revenue is disposable revenue or recurring revenue. We’re looking at as we mentioned about 33% to your compounded annual growth rate overall. And as U.S. recurring revenue goes, so goes the Vapotherm revenue profile. So we’re really expecting the U.S. disposable revenue to really go grow nicely over a 2-year compounded growth rate basis versus what we saw in 2020, which was obviously a heavy capital contribution due to COVID-driven demand.

[Margaret Kaczor:]

Okay. So, I guess, 2 questions on that. One, Joe, you talked about installed base growth being a focus for 2021. So how should we think about that? And then, 2, John, you just talked about disposable utilization or disposable being a growth driver. But I think in your forward comments, you also talked about utilization being a little bit lower as well as these new systems ramp up. So what magnitude is your guidance assuming kind of on the high end and the low end for those 2 drivers?

[John Landry:]

Sure. So in terms of the installed base first, clearly, we won’t see or realize the same type of installed base growth we saw in 2020. So we’re looking more at pre-COVID types of levels, which were in the mid-teens prior to COVID to go back to the 2018, 2019 timeframe, so we’re thinking we’re going to be in that that sort of affinity for 2021 and beyond. And in terms of the disposable utilization, we do expect to see utilization decrease in comparison to historical averages in terms of what that looks like on a 2-year compound annual growth rate perspective, in particular, U.S., which is the heavier contribution we see kind of in the low-30s in terms of what the guidance reflects, in terms of that 2-year compound annual growth rate overall.

[Margaret Kaczor:]

Okay. So just kind of the last question, I don’t take up too many questions. But as we look at, whether it’s 2022 or beyond, John, you’ve just talked about kind of a mid-teens growth and installed base assuming utilization is even flat, that means kind of the underlying growth, hopefully should be around kind of the mid-teens, or at least double digits for the overall business. So is that what you guys are thinking about, it’s not higher given utilization improvements? And then what is HVT 2.0, the HGE acquisition and all these other things you’re doing? Where does that get you, because it seems like it should be a pretty solid, it’s not a stronger profile? Thanks, guys.

[John Landry:]

Yeah. So longer term, Margaret, so we’re really going to be focused in on driving the installed base on a recurring revenue, we like what we see here in terms of the installed base we had in 2020, that we realized like what we’re seeing going into 2021, and to your point expected to drive that going forward at those mid-teen rates. I think the things that we have is a tailwind for us in this recent COVID experiences, the increased awareness of the technology in the marketplace as well as in the ED Gold and Silver accounts, which are very large accounts with a lot of expansion opportunities, and which are highly referenceable. So that’s a tailwind that we have behind us in terms of a potential headwind, the capital budget dollars for hospitals have been largely focused on ventilator and a number of respiratory devices this year. So it’s a sort of the wait and see, as to what’s going to be available for that going forward. So – and also the tailwind and headwinds we see in front of us, but we feel good that we’ll be able to at least grow at a rate, what we’ve been able to do historically on a go forward basis with the HVT 2.0, as well as some clinical data that we’re working on to help provide additional support to our field teams, especially in the Type II respiratory distress sphere.

[Margaret Kaczor:]

Okay. Thanks, guys.

[John Landry:]

Thank you.

[Operator:]

Next is Marie Thibault from BTIG. Your line is now open.

[Marie Thibault:]

Hi, Joe and John, thanks for taking the questions. I’ll try to fit in a couple here. I think I was most intrigued in your guidance, John, by the confidence in disposables growing year-over-year for 2021. So I wanted to try to drill down, is that something you expect to hold true for each quarter throughout the year? Or is there going to be a cadence to it? We should sort of look at it as a 2021, I know, particularly Q2 and Q4 could put up some tough comps for you there?

[John Landry:]

Sure, Marie, good to see – good to hear from you again. First, I guess, in terms of the disposables, we would expect to see seasonality in that recurring disposable revenue stream both in the U.S. and internationally. Again, fourth quarter or second quarter, typically higher than the third quarter where it’s generally a flat season for us. And with the lower utilization rates, we’d expect to see that sort of be the same across each of the quarters in 2021 as well.

[Marie Thibault:]

Okay. Okay. That’s helpful. And then what are you hearing from some of the ED Gold and Silver accounts, I know, you expanded a lot in that important segment this year? Are you starting to hear from them that they are committing to continuing to use their new systems? I think we just want to gain confidence around the fact that these systems will stay in use this year?

[Joseph Army:]

Hey, Marie, it’s Joe Army, I’ll take that one. So, I had shared with you guys a story on the third quarter call about what we had seen with helping these folks begin to learn how to use this gear on Type II respiratory distress. And that we had an increasing level of confidence around that. And I can tell you, leading up to the latest surge in the fourth quarter, I continue to feel that, we’re adding more and more clinical evidence around this application. And I’m hearing stories from our field team about already now – we saw the U.S. hospitalization start to drop by the middle of January. So our field team has not been sitting around, they went right back to work and teaching people about Type II. And the stories that I’m hearing now, and I feel – make me feel pretty positive about how this is all going to wind up. I do think, you’re going to see 2021 is going to be a little bit sloppy, but I’m very, very excited about what I get out of the end of 2021 and coming into 2022 with historical turn rates that are right therefore.

[Marie Thibault:]

Okay. That’s great to hear, Joe. Thank you. And then I guess one last one, if I can, the operating spend $97 million to $99 million this year, it implies some investments. I’m curious where you’re spending, is this on salesforce? Is this on clinical work? Or is it really just the new products that you’re bringing on board?

[John Landry:]

Sure, Marie, the main driver that is it’s really on some investments on the sales and marketing side. We’re also investing in new products and also in clinical studies, we want to continue to invest in clinical work, specifically the Type II respiratory distress support that our field team needs. So that’s where the investment dollars are really going into for 2021.

[Marie Thibault:]

All right. Thank you.

[John Landry:]

Okay.

[Joseph Army:]

Thanks, Marie.

[Operator:]

We have our next question from Jason Bednar from Piper Sandler. Your line is now open.

[Jason Bednar:]

Hey, good afternoon, everyone. I appreciate all the color on the call. Apologies to dig in here on guidance further, but didn’t want to come back to some of the commentary made there. You’re referencing some very limited capital budget dollars from hospitals to impact as soon as the second quarter of this year? Joe, John, are you hearing that directly from hospitals? Or are you simply anticipating that given what’s still an uncertain backdrop out there?

[Joseph Army:]

Hey, Jason, it’s Joe Army. How you doing?

[Jason Bednar:]

Good, Joe.

[Joseph Army:]

We’re not hearing it directly from hospitals, but we’re anticipating it. Our reps are suggesting to us that that’s what they’re seeing. There’s an awful lot of respiratory equipment that those hospitals have, the way of ventilators and other gear. So we’re trying to set this thing up and make sure that we’re running it in a way that is very achievable. So, John?

[John Landry:]

Yeah. I would agree with that, Joe. I think we’re anticipating that there have been some anecdotal discussions, but by and large, it’s more on the anticipation of what we expect to see here as COVID starts to fade away here with vaccines being rolled out.

[Jason Bednar:]

Okay, all right. That’s all guys. Thanks for that. And then, just talking about maybe some of the education efforts that you have just to drive it around that Type II opportunity, I mean, do you view, I mean, I got to – I know your answer is going to be here. But do you view in-person versus virtual education anymore less effective and in driving the understanding of the capabilities of Precision Flow better, again, particularly around that that Type II opportunity?

[Joseph Army:]

Let me tell you something, if you’d asked me that a year ago, I would have told you there’s no way that a sales rep could do this virtually. I would have told you absolutely, Jason, it can’t happen. But what we’re seeing in the field is virtual is turning out to be very, very effective. The other thing that has helped is these people have used our gear on a ton of patients. So they’ve gotten really good with it. Now, they’re hypoxic patients, but they’ve gotten really good and really confident with the gear. So there’s a lot of this is coaching and training and teaching them can happen virtually, it can happen in-person, it can happen to our clinical teams, and it’s happening. So I really like what we’re doing virtually, I like what we’re doing in-person, I can tell you that in the people that we are adding to the team. We’re putting more clinical people on the ground and getting them into those accounts and helping those people really master and think about using it on Type II patients.

[Jason Bednar:]

All right, that’s helpful, Joe. Maybe one more last one here, just I could sneak one more in maybe for your sales force and your team out there. I mean, with the kind of the – this is maybe sloppy here, as you put it, Joe. I mean, maybe you could just speak to how sales-force incentives are aligned with your expectations and your goals for the year, both with respect to kind of growing that installed base and also growing that consumables number of year-over-year.

[Joseph Army:]

You bet. So the majority of our rep comp is tied to disposables, as Johnny has told you guys over and over again. So the fact that we’re confident, we’re going to grow disposables over 2020; that creates a lot of alignment. And in terms of the sales-force alignment, we’re very sensitive to that. We want to make sure that we’ve got – we have great people, they’re very talented, they’re very experienced. And we want to make sure that they’re going to be able to make money and gain access to continue to grow. So I like the way we’ve got that aligned. I think that our field leaders did an excellent job with doing that. And at the same time, the ability to start to see operating leverage show up, we’re balancing all those things. So I like the way it’s come out.

[Jason Bednar:]

All right. Great. Thanks, guys. Appreciate it.

[Joseph Army:]

Thank you. Have a good one.

[Operator:]

We have a follow-up from Bob Hopkins from Bank of America. Your line is now open.

[Brad Bauer:]

Hi, there. Sorry to – sorry to jump back in again, just one question. We heard of a company, we heard of Masimo talk about adding high-flow capability to their platform. So we were just wondering if there is anything that we should be thinking about on that impacting competition going forward. I mean, again, the numbers you talked about for capital seem to be reasonable, but just wanted to hear if you have been seeing increased competition. Thank you.

[Joseph Army:]

Well, you got – thank you. So Masimo’s announcement validates what we’ve been saying all along about high flow, high velocity as an effective and versatile tool for respiratory distress. We have high regard for Masimo as a company. And it would be foolish to underestimate them. But we’re familiar with the softFlow product, and we’re very comfortable with how we stack up against it. And beyond that we have no further comment.

[Operator:]

Next in line is Bill Plovanic from Canaccord. Your line is now open.

[Unidentified Analyst:]

Hi, Joe and John. It’s John on for Bill tonight. Thanks for taking my question. Just quickly on the OEM in the U.S., any expectations for the U.S. IDE in terms of timeframe? And are you using any feedback or learnings from your OUS launch in those discussions?

[Joseph Army:]

Well, first, let’s just kind of break that into 2 pieces, right? The OUS has gone very well. And we like a lot what we’re learning. We were originally thinking about this as a device that’s really going to be aimed at the NICU at neonatal patients. But what we learned during our limited market release is that, is actually a really interesting application to adult population, which has implications for our TAM. And so, clearly, that has been a very important lesson learned for us. We continue to have very productive conversations with FDA, as we nail down the shape and size and parameters of our IDE, clinical trial. Having been designated as a breakthrough technology, we think that that’s going to turn out to be pretty important and pretty useful. But beyond that, I don’t have any further comment around timing here in the United States.

[Unidentified Analyst:]

Okay, thank you. And then, just overall, how do you see your penetration today and the overall opportunity, given the awareness? And how close do you feel like you’re becoming to a standard of care?

[Joseph Army:]

Well, I think we have ways to go to get to standard of care. I can tell you in certain settings we’re a standard of care, right? But we’re less than 10% penetrated around the world. We have a lot of room left to run. And we look at that as being a pretty good quarter, pretty good year. 2020 was a big, big change for us. But there is an awful lot of hospitals left to go. We’re only in 450 of the Gold and Silver EDs in United States. Well, that means there’s another 1,550 to go get, just to be in the top 2000. So, there’s a lot of room left to run. And we got a lot of work to do.

[Unidentified Analyst:]

Thanks for taking my questions.

[Joseph Army:]

You bet. Thank you.

[Operator:]

No further questions at this time. I turn the call back over to the company for closing remarks.

[Joseph Army:]

Well, again, we want to thank everybody for their time this evening and for your interest in Vapotherm. It means a lot to us. And we look forward to coming back to you here in the May timeframe to talk to you about the first quarter. And just to remind you, we will be hosting our first-ever Investor Day in the second quarter, and John will be updating everybody on that date. So thank you again.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Have a great day.