Vapotherm, Inc.
Q2 2021 Earnings Call Transcript

Published: 9 Aug 2021

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the Vapotherm Second Quarter 2021 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded. It is now my pleasure to introduce your host, Mr. Mark Klausner of Westwicke. Please go ahead sir.

[Mark Klausner:]

Good afternoon, and thank you for joining us for the Vapotherm’s Second Quarter 2021 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. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the Events link in the IR section of our website, vapotherm.com. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements. These statements are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated including those identified in the Risk Factors section of our annual report, filed on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission or SEC on February 24, 2021, our quarterly reports on Form 10-Q for the quarters ended March 31, 2021, and June 30,2021 which were filed with the SEC on May 5, 2021 and August 9 2021 respectively and in subsequent filings with the SEC. Such risk factors may be updated from time to time in our filings with the SEC, which are publicly available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise unless required by law. This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. With that, it's my pleasure to turn the call over to Vapotherm's President and Chief Executive Officer, Joe Army.

[Joe Army:]

Good afternoon and thank you for joining us today. I will begin by discussing our second quarter results. Then I will hand the call over to John Landry, our CFO, to provide the financial details of our second quarter 2021 results. I will then update you on our key areas of focus for the remainder of the year before taking questions. 2Q was another strong quarter for Vapotherm. We generated $20.6 million in revenue, and increased our worldwide installed base by nearly1,200 units to over 32,000 units. The majority of this increase was driven by our international business as COVID-19 was still prevalent in some areas outside the U.S. notably, Latin America. We rebranded HGE Digital Health Vapotherm Access and prepared to launch our Vapotherm Access Post Care offering. Lastly, we hosted our first ever Investor Day in our Exeter New Hampshire headquarters where we shared more about our strategy, products, and financial goals for the business. Our objectives for 2021remain the same 2.0 and four establish our digital business. These four objectives will guide us towards our goal of becoming the complex lung disease patient management company. Let me walk you through the progress we've made towards each of these during this quarter. Our first objective is to ensure the current installed base is productive. On that front, our one hospital one day or 1H 1D strategy is focused on training and educating customers on our technology’s ability to treat both hypoxic and hypercapnic patients. As part of this strategy, we actively engaged our ED Speakers Bureau to educate our customers on how to use our technology on all patients and to share their positive experience with high velocity therapy, especially with hypercapnic patients. As John will share with you, U.S. disposable utilization rates were lower in 2Q than our historical average. This is due to two main factors

[John Landry:]

Thank you, Joe. As mentioned, revenue in the second quarter of 2021was $20.6 million, compared to revenue of $35.2 million in the second quarter of 2020 and $12 million in the second quarter of 2019, a two year compounded annual growth rate of greater than 30%. Recall the second quarter of 2020 was our first full quarter of COVID-19 related demand. U.S. revenue was $11.3 million, compared to the second quarter of 2020 revenue of $25.7 million. International revenue was $9.3 million, compared to second quarter of 2020 revenue of $9.5 million. Capital revenue was $6.2 million in the second quarter of 2021, compared to $21.5 million in the second quarter of 2020. Worldwide capital revenue decreased year-over-year due to the significant COVID-19 related demand we experienced in the second quarter of 2020. In the second quarter of 2021, we sold 1,300 PF units worldwide versus 3,900 in the second quarter of 2020, which was driven by significant increases in Covid-19 related hospitalizations. U.S. capital revenue was $2.7 million, compared to $16.1 million in the second quarter of 2020. International capital revenue was $3.5 million, compared to $5.3 million in the second quarter of 2020. Disposable revenue was $12.8 million in the second quarter of 2021representing $4,00,000 decrease over revenue of $13.2 million in the second quarter of 2020. In the second quarter of 2021, we sold roughly 138,000 disposables worldwide versus 139,000 in the second quarter of 2020. While the total number of disposable sold was nearly flat, there was a much higher concentration of international disposable sales in the second quarter of 2021. International average selling prices are lower than in the U.S. as we largely use the distribution network to serve the international markets. U.S. disposable revenue was $7.3 million, compared to $9.4 million in the second quarter of 2020, due to a year-over-year decrease in COVID-19 hospitalizations and lower respiratory centers. International disposable revenue was $5.5 million, compared to $3.7 million in the second quarter of 2020 due to significant COVID-19 demand in Latin America. Worldwide service revenue was $1.7 million in the second quarter of 2021, compared to $539,000 in the second quarter of 2020. The increase in worldwide service revenue was due to Vapotherm Access related revenue and an increased worldwide installed base of precision flow units. Our worldwide installed base grew by approximately 1,200 units in 2Q. As of the end of the second quarter, our installed base consisted of approximately 32,000 units, reflecting 45% year-over-year growth. Much of the installed base growth was driven by an increase in Latin America and Brazil, in particular, as they faced elevated COVID-19 hospitalization levels going to winter. Our monthly U.S. disposable utilization rate for the second quarter of 2021 was 1.05 as compared to 2.15 in the prior year and 1.83, which was the average disposable utilization rate for the second quarters of 2017 through 2019. The U.S. disposable utilization rate decreased year-over-year due to several factors, which still Joe, just said in his comments. First, our installed base expanded significantly due to COVID-19, which resulted in an influx of patients who are hypoxic, meaning they could not get enough oxygen in their system. As expected, it will take time for these newly installed units to become fully productive and we are especially focused on educating our new customers on how our technology works with hypercapnic patients like COPD patients who often have difficulty clearing carbon dioxide from their system. Second, 2Q U.S. hospital census, as measured by respiratory-related discharges was over 20% below the respiratory-related discharge for the second quarter of 2019. We believe this reduction in respiratory-related discharge is due to near zero through and RC levels and the fear of being exposed to COVID-19 in the hospital. We expect these patients to return to the hospital over the long term. Despite a 20% decrease in respiratory census, our U.S. disposable revenue grew by 18% in the second quarter 2021, as compared to the second quarter of 2019. This gives us confidence that we'll be able to grow our business in the mid-teens post-COVID. The monthly international disposable utilization rate for the second quarter of 2021was 2.29 as compared to 2.70 in the second quarter of 2020 and 2.45 which was the average disposable utilization rate for the second quarters of 2017 through 2019. The international disposable utilization rate increased year-over-year due to our significantly expanded installed base. As in the U.S., it will take time for the newly installed units to become fully productive. Gross profit in the second quarter of 2021was $9.4 million, a decrease of $8.2 million over gross profit of $17.6 million in the second quarter of 2020. Gross margin was 45.6% in the second quarter of 2021, compared to 50.1% in the second quarter of 2020. The decrease in gross margin is primarily due to overhead and low absorption as production returned to normalized levels and to a lesser extent, a shift in revenue mix to international revenue. The decrease in gross margin was partially offset by higher disposable revenue relative to the second quarter of 2020. Operating expenses were $26 million in the second quarter of 2021, an increase of $1.6 million over $24.4 million in the prior year. The increase in operating expenses was primarily due to an increase in research and development and general and administrative expenses, partially offset by reduced sales and marketing expenses. Net loss in the second quarter of 2021was $17.3 million, or $0.67 per share, compared to a loss of $8 million or $0.35 per share in the second quarter of 2020. Adjusted EBITDA loss for the second quarter of 2021was negative $12.3 million, compared to a negative $4.3 million in the second quarter of 2020. The increase in adjusted EBITDA loss was primarily due to a reduction in revenue on a year-over-year basis. As of June 30, 2021, cash and cash equivalents were $81.5 million, compared to $93.8 million as of the end of March 2021 and $113.7 million as of December 31, 2020. In the second quarter of 2021 we used cash of $12.3 million, of which $2 million was used to pay down principal on our line of credit. In terms of guidance, recall that we're only providing annual guidance. Based on the results of 2Q of 2021 and our expectations for the full year, we now expect full year revenue to be between $85 million and $91 million, which represents an increase of 83% over 2019 and a two year compounded annual growth rate of 35% at the midpoint of this range. This new revenue guidance reflects an update from previously issued full year revenue guidance of $82 million to $88 million. This full year revenue guidance reflects the impact of COVID-19 that we've seen so far in early 3Q. As previously communicated we expected light capital sales in the second half of the year due to reduced capital budgets. However, we are currently seeing increased demand for our capital units and disposables in certain U.S. geographies due to COVID-19 variants. Therefore, we expect to see near similar worldwide revenue levels in the third quarter as we did in the second quarter, driven by COVID-19 demand in the U.S. while we expect international revenue to grow about 30% over the third quarter of 2019. Based on what we had experienced in previous COVID-19 surges and the potential impact of mask mandates and return of social distancing, our guidance assumes lower worldwide revenue in the fourth quarter, than in the third quarter, which is the opposite of what we typically see. It continues to be difficult to predict the timing, duration and impact of COVID-19 on hospitalized patients around the world and to the extent the impact of COVID-19 deviates from our expectation, our full year revenue forecast would be impacted. We continue to expect full year gross margin to be between 46% to 48% as we now expect full year operating expenses of $99 million to $102 million, an increase from previously issued operating expense guidance of $97 million to $99 million, due primarily to investment in our Vapotherm Access offering. At our Investor Day, we also introduced long-term financial goals. We intend to grow our revenue annually in the mid-teens resulting in revenue doubling over the next five years and improve our gross margins to 65% over this five year timeframe. This concludes my remarks. I'll now turn it back over to you, Joe.

[Joe Army:]

Thanks, Johnny. Before sharing our 3Q objectives, I'd like to - some of the highlights from our Chief Commercial Officer’s extended U.S. field travel. As soon as our Investor Day was completed, Greg Ramade spent three weeks on the road visiting customers. His key findings were confirmation of the following

[Operator:]

First question comes from the line of Bob Hopkins from Bank of America. Your line is open. You may ask your question.

[Brad Bowers:]

Hi there. Thank you for taking the questions. It's Brad Bowers on for Bob today. So, I really appreciate all the color you gave on the disposables in the quarter, understand that it might be a little lighter. But just want to know - should we think as the floor for maybe your utilization going forward? I mean, you have COVID coming up, people getting vaccinated and you don't really have the rise in the delta in the quarter. So is that’s the right way to think about it?

[John Landry:]

Hi, Brad, it's John. Thanks for your question today. So, in terms of where we were, Brad, as we think about the quarter, when we look at the installed base, growth that we saw there over that period of time in the last five quarters we grew about 65%. And one thing we saw there is that the - basically the utilization in the quarter is about 1.05 versus what we saw previously of 1.9. We also saw our respiratory census about 20% as compared to the second quarter of 2019. So, I guess when you think about it in terms of the floor, not sure that we'd see respiratory census decrease much more. I think we saw pretty much near zero flu, very low RSV. And in addition, we saw a lot of the COPD patients staying away from the hospital. So from a pure numbers perspective of patients entering a hospital, we’d say it may not be the absolute low point, but it is pretty low from a census perspective for patients that would be eligible to treat.

[Brad Bowers:]

Got it. That's helpful. And then, just one more follow-up if you don't mind. So, I appreciate you giving some color on Q3 given all the noise in here that will help out with modeling. So, but just thinking about what that kind of implies for Q4. I mean, that implies almost flat for the rest of the year. I am doing that right. Obviously, give or take a little in Q3 here, but just wanted to understand what your assumptions are maybe for Q4 on utilization. I would imagine that it's not as much on capital and it would be on some of the disposables coming back in Q4. But it that's really seem to - the guidance that we seem to imply that and so just kind of wonder what's your thoughts with there? Thank you.

[John Landry:]

Sure, Brad. So in terms of the concentration of fourth quarter from a capital perspective, we expect in the U.S. our assumption is that capital would be, particularly in the U.S. pretty light for that fourth quarter. Again, what we've seen in previous surges is once the surge comes through, then typically it's slowed a period after that after typically a 59 day window. So we won't expect much in the way of capital in the fourth quarter. And we would see utilization on the disposables in the fourth quarter assumptions and probably a little bit above what we've seen here in the second quarter, as we do go into flu season, as we do go into RSV season and as kids go back to school and alike. So that's how we're thinking about it. What we've particularly seen is, fourth quarter is typically large than the third quarter. Here, we'd expect to see third quarter larger than fourth quarter coming out of the year.

[Brad Bowers:]

Thank you.

[Operator:]

Your next question comes from the line of Margaret Kaczor from William Blair. Your line is open.

[Maggie Nolan:]

Hey, guys. This is Maggie on for Margaret. And I just wanted to ask a question on, kind of what that full year guidance implies. So, are there any assumptions for the flu RSV, particularly in the fourth quarter in that full year guide or they are mainly just the COVID-19 assumptions? And then, how are you guys thinking about the impact of the flu as we head into the back half of 2021and into 2022. Thanks.

[Joe Army:]

Sure. Maggie. Thanks for the question today. In terms of third quarter, we're looking at that as the quarter, largely in the U.S. in particular driven by some of the COVID demand that we're seeing in certain geographies in the U.S., particularly in the southern part of the U.S. that we're reading about in the news here recently. And again, as we've seen in other surges, typically a 60 to 90 day window, before we start to see it subside. So in the fourth quarter, our assumption is that, we'll see that happen again here. And in particular, we're thinking about modest flu season, modest RSV season given the introduction of or the introduction, I should say, mask wearing and potentially social distancing here in the fourth quarter as we adjust to the increase here in COVID-19 cases in the U.S.

[Maggie Nolan:]

Great. Thanks. That's helpful. And then, if I could just ask one more, just maybe on 2022, kind of looking at the disposable turn rate, so, I know you guys have talked about the turn rates being lumpier, particularly in 2021. And just kind of with what we saw in the second quarter, do you expect those lumpiness to continue as we head into 2022? How can we think of that particularly as you look for more the HVT 2.0? Thanks so much.

[Joe Army:]

Sure. Maggie. As we think about disposable utilization rates, our experience is that, it probably be continue to be a lumpy period of time. And so, we can get beyond COVID and COVID normalizes out. From an expectation perspective, we think it’s probably about four to six quarters of period of time for us to work through our installed base, work through educating all of our net new customers on the use of our technology across all use case settings, whether it’s hypoxic or hypercapnic patients. I think as we look at the success we've had here in the top couple hundred accounts in the U.S. in which we were able to educate those customers and we saw that their turn rates were at or above historical levels in the second quarter as we continue to educate customers beyond the top two hundred, we're confident that over the long-term, we'll be able to get those utilization rates back to historical levels. And again, four to six quarters, probably be about the timeframe we think to get there post-COVID stabilization.

[Maggie Nolan:]

Okay. Great. Thank you.

[Joe Army:]

You are welcome.

[Operator:]

Your next question comes from the line of Bill Plovanic from Canaccord. Your line open.

[Unidentified Analyst:]

Hi. It's John getting on for Bill tonight. Thanks for taking our question. Maybe just touching on what you're seeing right now in Q3. We've been hearing some clinicians that this wave of COVID is much different than the previous waves, specifically on the patient demographic. How do you think this impact the utilization of VAPO’s technology?

[Joe Army:]

Yes. Hi, John. Thanks for the question tonight. In terms of what we are seeing now is, we're seeing the COVID variant, to your point impact people of all ages including younger people, whereas in some of the previous wave it is more older patients, more vulnerable patient populations. In terms of what we are seeing now is it's impacting in particular specific geographies here in the U.S. The Florida, Louisiana, Texas, across the Southern U.S. at this point. In terms of what does it mean for adoption or utilization of the technology, I think it probably be depending upon where COVID hospitalizations track and trend and I think it probably be fairly similar. Our technology applies to patients of all ages is suffering from respiratory distress. So, we have the capability to support any patient who presents an emergency department of respiratory distress. So, I think depending upon where COVID hospitalizations go in large part determine the utilization here in the third quarter.

[Unidentified Analyst:]

Great. Thanks. And just a follow-up question. I believe you in implementing market release for Vapotherm Access in the quarter. Any early lessons from that market release it implies the full market release? Thanks again for taking our questions.

[Joe Army:]

I think I could take that one if you want. So, I think what we've learned is, we're learning it is it a hospital is particularly our five hundred gold and silver ED accounts. It seem to be quite interested in this solution. This is a real problem for them, knocking that readmission rate down under the national average is a pretty important problem. And this is a very unique solution to bring that. So, they are also to running into the challenge of helping the wise people learn how to sell a service. And we're lucky in that we've got view of our folks in that field team that came from that background. And so, that’s helping a lot. It was great to have all of those folks together in person in Chicago here, earlier early in the quarter and watching them really learn this and digest it. But, I think what we've learned is that, this is a solution this is a problem that those hospitals are really looking for a solution. And what we really like about it is the fact that we're already treating these patients with our high velocity therapy these hypercapnic patients, as well as hypoxic when they get into ED. So it's a really nice fit all the way around.

[Unidentified Analyst:]

Great Joe and John.

[Operator:]

Next question comes from the line of Marie Thibault from BTIG. Your line is open.

[Marie Thibault:]

Hi, Joe and John, thank you for taking the questions. I'd like to ask my first here, maybe as a two-parter on the training and education process. I heard those stats about the top-200 accounts and the higher utilization seen with those accounts. So I am curious about, how long that training kind of took to kick in for those accounts? And when you start to see sort of that improvement or that tipping point for those accounts? And secondly, how we should think about the delta variant or future variants sort of impacting your training efforts? I am wondering if hospitals are starting to shut down access or asking you to put these things on pause. So, any updates there would be great.

[Joe Army:]

So, Marie, that's a excellent question. And it's one of candidly, it's a source of frustration for me, because second quarter was the quarter where it was pretty clean and our people were back in these accounts and we had them all focused on those top 200 accounts running 1H 1D and its work that gives us a great deal of confidence when we look at that about how this play is going to work in total when we run it through the rest of the book. But you are spot on when you mentioned, this delta variant is closing down our access. It is moving us back away from being able to be in these accounts every day and supporting them as they learn how to use it on non-COVID patients. But listen, I'm not going to complain about that, because the faster we can grow that install base, the bigger this business becomes in the medium to longer term. So, it will one, if 1H 1D works and typically, you're going to see results pretty soon around this from the time you go in there and do your 1H 1D, you're beginning to see them use it on other types of patients pretty quickly. But it is frustrating that we are now back into a situation where we're really focused on supporting all of our accounts who are dealing with a COVID surge and making sure that we can meet every demand every need that they have.

[Operator:]

Our last question comes from the line of Jason Bednar from Piper Sandler. Your line is open.

[Jason Bednar:]

Hey guys. Thanks for taking the questions. A couple from me today. I am going to skip over 2021 here for a second. You gave some other forward looking commentary here including around the ability to grow mid-teens in gross margin. This should be above 2020 levels. And so, I wanted to confirm that that the mid-teens comment was a company-wide common I think from your end even though I think you're referencing disposables growth there in the period just in terms of how you're thinking about the business as we normalize beyond the 2021. So just wondered if I am that that correct and how you are characterizing that point. And then, on the gross margin side, how much that margin upside versus 2020 is volume dependent, versus what might actually be within your control to make production more efficient to pull out costs.

[John Landry:]

Yes, Jason, thanks for questions. It's John here. In terms of our ability to grow the business going forward, yes, I think mid-teens is on the overall business itself. I think our long-term guidance that we provided at Investor Day was 15% per year on a compounding growth rate doubling the business over a five year window. So we feel good about that. We like what we've seen in the U.S. accounts, training educating the top 200 accounts especially and continue to go on deeper and wider there. In terms of the gross margin improvement as we look at it going forward, I think a lot of it is within our control. I think we have levers - all the levers are in play, Jason, to continue to drive that gross margin going forward. I think with new product introductions we have in the horizon here, the ability to drive our selling prices up through incremental clinical economic utility by providing these customers to the ability to reduce cost as we have redesigned and worked on the design of these new products for continued improved quality, as well as cost reduction through these manufacturability. And then, the last one is, the overhead utilization to the extent that we normalize our production over the longer term, that lever in terms of being able to drive down overhead rates per unit still in play as well. So, all three levers are intact going forward, Jason, to get to that 65% level longer term. I think 2022, I think we'll have the ability to again move back above the 2021 levels and above the 2020 levels by really driving the production volume and driving volumes after sequentially reduced sales and production volume year in 2021versus 2020.

[Jason Bednar:]

Alright. Got it. That's helpful, John. Thanks for that. And then, just to come back to the OpEx guide for this year and you do have some incredible spending dollars that are going towards Vapotherm Access. So it looks like some wise incremental spending that you're doing there to fund that initiative. Wondering if you could spend more maybe on just where those dollars are being targeted? Are these people cost, infrastructure cost, product or software development costs? And then, how are you thinking about the ROI or for the incremental spending on Vapotherm Access maybe relative to some of the other product development efforts that you guys have undertaken here? Thanks.

[Joe Army:]

Sure, Jason. Yes. Good questions. So, as we think about the investments we're making, a lot of it's - you touched on all the areas, I think across the board in terms of building out the infrastructure necessary to deliver that post care access to these patients in a hospital-based setting, making sure that we have all the infrastructure backbone available to support those patients and clinicians, as well as on the marketing initiatives to broaden the message around Vapotherm Access Post Care and what it means to a hospital from a patient outcome and potential economic outcome, as well. So, I think it's sort of evenly split between those. As we think about the ROI, we look at that as a new product introduction with very favorable downstream ROI implications for us, at least on par with our next-generation platforms. There will be some potential investments that we need to make to drive it. But we're excited about what it could do for our business from a top-line perspective downstream, which is why we made a conscious decision to make the investments in Vapotherm Access Post Care this year.

[Jason Bednar:]

Alright. Thanks so much.

[Joe Army:]

You are welcome, Jason.

[Operator:]

We have a follow-up question comes from the line of Marie Thibault from Btig. Your line is open.

[Marie Thibault:]

Hi. Thank you. Wanted to try to sneak in a follow-up here on international. When I look at the installed base, about a third of your units now are placed internationally. And I wanted to hear a little bit about the stickiness of some of that, I know we focused a lot on the U.S. today, but what sort of training efforts are you putting in there? What sort of investments are you making in your field teams to try to ensure that the units are used outside of COVID going forward? Thanks.

[Joe Army:]

Thank you, Marie. That's an excellent question. And many of the same plays that we are running in the U.S. around 1H 1D with a focus on hypercapnia. We're running them through our direct businesses in Germany and in the UK. Through the dealer model, we're providing them more materials. We also have clinical people on the ground in a number of these markets including Brazil and Mexico, for example. We have people on the ground in the Middle East and in other parts of Europe and now we have people on the ground in Japan. And so, our goal is to provide that clinical support on the ground through our dealers and continue to share that those best practices that we develop in other places, but it's basically the same place. We're running it through dealers.

[Marie Thibault:]

Alright. Again, thank you.

[Operator:]

There are no further questions at this time. I would like to turn the conference back to Mr. Joe Army for closing remarks.

[Joe Army:]

Thank you very much. I want to thank you all for your interest in Vapotherm. We really appreciate it. And we look forward to updating you on our progress again next quarter. Have a great day.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.