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Edited Transcript of SSH earnings conference call or presentation 20-Feb-19 2:00pm GMT

Q4 2018 CHF Solutions Inc Earnings Call

EDEN PRAIRIE Apr 18, 2019 (Thomson StreetEvents) -- Edited Transcript of CHF Solutions Inc earnings conference call or presentation Wednesday, February 20, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claudia Napal Drayton

CHF Solutions, Inc. - CFO

* John L. Erb

CHF Solutions, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Scott Gordon

CorProminence, LLC - Co-Founder, President & Editor-In-Chief

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Presentation

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Operator [1]

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Good morning, and welcome to the CHF Solutions Earnings Conference Call for the Fourth Quarter ending December 31, 2018. (Operator Instructions) Participants of this call are advised that the audio of this conference can -- call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the end of the call.

I would now like to turn the conference over to Scott Gordon, President of CORE IR, the company's investor firm. Please go ahead, sir.

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Scott Gordon, CorProminence, LLC - Co-Founder, President & Editor-In-Chief [2]

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Thank you, operator. We thank you all for joining today's conference call to discuss CHF Solutions' corporate developments and financial results for the fourth quarter ended December 31, 2018. With us today are John Erb, the company's CEO and Chairman of the Board; and Claudia Drayton, the company's CFO. At 8 a.m. Eastern Time today, CHF Solutions released financial results for the fourth -- for the quarter ended December 31, 2018. If you have not received CHF Solutions' earnings release, please visit the Investors page at www.chf-solutions.com.

During the course of this conference call, the company will be making forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of CHF Solutions are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that are based on management's beliefs, assumptions, expectations and information currently available to management. Those risks include, but are not limited to, risks associated with the possibility that the company may be unable to grow revenue in future quarters, that the company may be unable to execute in its commercialization strategy, the possibility that it may be unable to raise the funds necessary for the company's anticipated operations, that the company may not be able to commercialize its products successfully, that the company may not be able to successfully integrate acquired technology, and the other risk factors described under the caption Risk Factors and elsewhere in the company's filings with the Securities and Exchange Commission.

By providing this information, the company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments or otherwise. You should review the cautionary statements and discussion of risk factors included in the company's press release issued today, the company's latest 10-K, subsequent reports as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements Related to Forward-Looking Statements, for an additional discussion of risk factors that could cause actual results to differ materially from management's current expectations and those discussions regarding risk factors as well as the discussion of forward-looking statements, in such sections are incorporated by reference in this call and are readily available on the company's website at www.chf-solutions.com.

With that said, I would now like to turn the call over to John Erb, CHF Solutions' Chief Executive Officer and Chairman of the Board. John?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [3]

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Thank you, Scott, and good morning, everyone. Welcome to our fourth quarter 2018 earnings call and corporate update. CHF Solutions continues to successfully execute on the strategies we have publicly talked about over the past 12 months, including, one, investing in our direct U.S. sales and clinical teams; two, expanding our market target areas with new clinical applications for fluid management; three, growing our international distribution footprint; four, developing and/or investing in diagnostic technologies to help our customers manage fluid removal; and most importantly, number five, increasing revenue growth.

I will review each of these strategic initiatives this morning, starting with our fourth quarter revenue growth. Fourth quarter revenue was $1.5 million, an 80% increase in year-over-year revenue versus Q4 of 2017 representing 7 consecutive quarters of year-over-year double-digit growth. Revenue growth for the year 2018 was 41% compared to the year 2017. Our revenue growth is a result of successful execution of our commercialization strategy and the investment we have made in our direct U.S. sales team and clinical team. We are now fully staffed with 13 U.S. sales territories and 5 clinical education specialists.

In January, we promoted one of our experienced account managers to regional manager, to join our commercial management team of a VP of U.S. sales, senior director of clinical education and VP of international business development. Going forward, we expect modest additional investment in the field organization and will focus on leveraging the investments we have made through 2018. As previously announced, we have expanded our commercial focus into the post cardiovascular surgery market. With the synergies between heart failure cardiologists and cardiovascular surgeons in the treatment of heart failure patients suffering from fluid overload, expansion into the post CV surgical market is a natural next step for commercial focus.

The cardiovascular surgical market includes procedures such as heart valve replacements, coronary artery bypass grafts, left ventricular assist devices and heart transplants. There are over 7 million cardiovascular surgeries per year in the U.S. alone. Cardiovascular surgery patients often need treatment for fluid overload and frequently fail diuretic therapy. Surgical patients can be challenged by fluid overload post procedure due to the extra fluids administered during surgery or medications administered post surgery.

Fluid overload accounts for 13.5% of post CV surgery readmissions to the hospital and is reported as the third most common cause of hospital readmissions within 30 days of surgery. And the #1 cause after 30 days post surgery. Excess fluid, if not removed effectively, contributes to renal dysfunction, arrhythmias and infections and is associated with increased ICU length of stay at a threefold increase in mortality. The Aquadex FlexFlow System offers a simple form of ultrafiltration that can be prescribed by any medical specialty for the treatment of volume overload in postsurgical patients who are not responding to diuretics.

In addition, we have begun discussions with the FDA in preparation for a presubmission meeting with the FDA, we -- which we expect to occur in the second quarter of this year, to modify our label to specifically include pediatric patients. We are not currently marketing to the pediatric market, but we are aware that our products are being used to treat pediatric patients. Several children's hospitals use Aquadex to treat pediatrics because of the low volume of extracorporeal blood, only 33 milliliters required in our Aquadex system.

These children's hospitals are treating pediatric patients for many conditions that can result with fluid overload, including kidney replacement therapy, heart disease, cardiac surgery, extracorporeal membrane oxygenation therapy and organ transplant. We expect 510(k) clearance of a specific indication for pediatrics in the second half of 2019. We look forward to continuing to partner with the medical community in the treatment of fluid overload in patients and believe these initiatives create a significant market growth opportunity.

We are making progress moving into the heart failure outpatient market, primarily with our clinical partnership with the Tampa VA. As previously disclosed, the United States Department of Veterans Affairs has awarded CHF Solutions, Inc., a 5-year, $6.5 million contract to supply Aquadex FlexFlow Systems and blood circuits to the James A. Haley Department of Veterans Affairs medical center in Tampa, Florida. Both the consoles and the disposables will be utilized for an outpatient physician initiated study focused on improving veterans' quality of life and reducing the cost of hospital admissions by using the Aquadex FlexFlow System in VA outpatient care facilities.

There are also several U.S. hospitals providing the Aquadex FlexFlow therapy in their outpatient clinics to avoid a 30-day readmission and the cost and penalties that can be assessed by Medicare. Our international business continues to grow with the fourth quarter negotiations and recent addition of distribution in India and Brazil. In December, the Aquadex system was used in a U.K. hospital to treat a man that had been hospitalized for 5 weeks due to complications of fluid overload after cardiovascular surgery.

During a 3-day Aquadex treatment, approximately 4 gallons of fluid was removed and the patient was discharged from the hospital the next day. We are dedicated to providing physicians with solutions that help them more effectively treat fluid-overloaded patients. We remain focused on identifying and researching multiple diagnostic technologies that more clearly inform treatment providers on appropriate Aquadex patient selection, when to initiate therapy, how to manage throughout the therapy, and when to discontinue ultrafiltration.

We expect to initiate a clinical evaluation with Daxor Corporation soon to document the synergies between the company's Aquadex FlexFlow System and Daxor's BVA-100 blood volume analyzer to assist in informing clinicians on fluid volume status and how to manage therapy to achieve positive clinical results. We believe that this collaboration with Daxor is another important building block of our strategy to evaluate diagnostic tools which may refine and maximize fluid management therapy.

During the fourth quarter, we submitted 2 new patents to the U.S. patent office detailing several enhancements and new features for the Aquadex FlexFlow System. An example includes the ability to significantly strengthen our AcQtrac bioimpedance technology with both central venous pressure measures and systemic vascular resistance measures to accompany our Aquadex FlexFlow System. Given our expanded, worldwide commercialization efforts, we anticipate further accelerated sales growth by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists and cardiac surgeons.

Our vision is to become the global market leader in fluid management with solutions to improve patients' quality of life. CHF Solutions continues to be at the forefront of fluid management in heart failure when diuretics have failed, spearheading the growing awareness of the current challenges faced with using IV diuretic therapy only, and thereby introducing the clinical value of ultrafiltration treatment as an opportunity to improve clinical outcomes, reduce hospitalization rates and reduce a major expense to the health care system.

I will now turn the call over to Claudia, who can walk you through our Q4 2018 results and financial details. Following that, I will provide some closing comments and will open the call to questions.

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Claudia Napal Drayton, CHF Solutions, Inc. - CFO [4]

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Thanks, John. Good morning, everyone. Turning to the P&L. Revenue for the fourth quarter was $1,499 million, a growth of 80% over Q4 of 2017. For the year 2018, revenue totaled $4,998 million, a 41% growth over 2017. Regarding our operating costs and expenses. Total costs and expenses for Q4 2018 were $5.8 million compared to $8 million the year before. I will briefly comment about major drivers.

First, regarding our cost of goods sold, Q4 was the last quarter we sold finished goods that were purchased from Baxter under the manufacturing agreement we signed at the time of acquisition. The purchase of the inventory was at a markup of 60% over the cost that Baxter incurred to manufacture the product. In addition, cost of sales includes startup manufacturing costs incurred in the transition of the manufacturing activities to our facilities in Minnesota, which we completed in August 2018.

Second, regarding our SG&A expenses. The Q4 2018 increase over Q4 of 2017 is driven primarily by the investments we have made in our sales and marketing organization over the last 12 months, including additional sales territories, clinical support and sales and marketing leadership.

Third, the increase in our R&D expenses are driven by investments we are making in product development to improve the functionality of our products and to improve customer experience and drive adoption in the marketplace.

Finally, in the fourth quarter of 2017, we recorded a noncash write-off of our intangible assets in goodwill totaling $4 million. We did not have any impairment losses in the fourth quarter of 2018. The net loss for the quarter was $4.3 million compared to a net loss in the fourth quarter of 2017 of $7.1 million.

Regarding our liquidity position, we used $2.8 million of cash in the quarter to finance operations, a $300,000 decrease from the same quarter in 2017, and a $500,000 decrease from Q3 2018. For the year, we utilized $14.6 million to finance operations, an increase of $2.7 million for the year 2017. We ended the quarter with approximately $5.5 million in cash and cash equivalents and no debt.

In terms of modeling 2019, we expect revenue to continue to grow double digit versus the prior year and to continue the trajectory we have been for the last 7 quarters. We expect -- as our sales force gains experience in the territories and the marketing and education programs we have implemented throughout 2018 will continue to have an impact and will result in continued revenue growth.

Regarding our gross margins, we expect to start selling our own manufacture inventory in Q1 2019 and to see the margin benefits from eliminating the Baxter manufacturing markup. In later quarters, as our internal production volumes and efficiencies increase, we expect to see additional margin improvements. Regarding our operating expenses in 2019, we will focus on leveraging the investments we have made in prior years, so we should see modest increases in our spending levels.

I will now turn the call back over to John.

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [5]

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Thank you, Claudia. Before opening the call for questions, let me reiterate that we continue to be very optimistic about our future.

Looking ahead, we continue to fine-tune growth strategies to optimize significant opportunities, to improve clinical outcomes and health care cost reduction by giving health care providers a viable and clinically proven alternative to diuretics. We continue to develop and refine our focus to demonstrate a strong business model by driving revenue, which is the key metric our employees, shareholders and potential investors will use to measure our performance.

CHF Solutions is devoting its energy to building new solutions to assist in the treatment of fluid management. We are dedicated to bringing proven solutions that improve the quality of life for these patients and the clinicians who have the passion to treat them.

Operator, please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a response from the line of Jeffrey Cohen.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [2]

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Can you hear me okay?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [3]

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Yes, hear you fine, Jeff.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [4]

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Okay. John and Claudia, so just wanted to go through a number of issues. So firstly, can you give us a sense, as of end of year, number of placements that are in use out there in the marketplace or an approximation, please?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [5]

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I can give you an idea that there's approximately 200 hospitals that actually have the equipment. We have really begun to focus more intently on penetrating in hospitals that are utilizing equipment on a regular basis, so I would probably lower that down to the attention our sales team is focused on. It's probably less than 200. But again, moving forward, as we shift to CV surgery, we have a fair amount of attention in the same hospitals, but now moving from heart failure to additionally calling on the CV surgeons and that seems to be very positive. Our revenue in 2018, approximately 33% of our volume came from hospitals that were also beginning to use the product in CV surgery.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [6]

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Okay. Got it. And next, could you give us a little more color as far as margins? Claudia, you talked about working off the previous volumes so Q4 was 34.4%. So as you come out of the second half of '19, I imagine we should see about 10 points of margin expansion over the coming quarters. How do you feel about that?

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Claudia Napal Drayton, CHF Solutions, Inc. - CFO [7]

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Yes. I think that's a safe assumption. It could be north of that, but I won't commit to that at this point.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [8]

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Okay. Got it. And could you talk a little bit about as far as some of the OpEx, so R&D was again kind of matching the territory of Q3? So back half was about -- closer to $1 million per quarter. So going forward, I think 2018 was about $3.05 million in R&D. Do you see that clipping at closer toward the $1 million per quarter range as opposed to $0.5 million? And then some commentary on the SG&A from Q4. So is it safe to say your SG&A expense for the moment is fairly bolstered at current levels, and we should only see, let's just say, single-digit increases for 2019?

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Claudia Napal Drayton, CHF Solutions, Inc. - CFO [9]

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Yes. I think that's true across the board on our OpEx, that we will see modest increases, if any. In R&D, probably flat to single digits. In SG&A, I would say single-digit increases.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [10]

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Okay. But when you say R&D flat, are you saying for the year or flat to Q4?

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Claudia Napal Drayton, CHF Solutions, Inc. - CFO [11]

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Flat to Q4.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [12]

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Flat to Q4, okay. Which would then be about 24% increase year-over-year if you get toward that $3.8 million. Okay. And SG&A, as far as the sales force, you're comfortable with the current size of the commercial organization? Should that change much materially either way during 2019?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [13]

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We do not plan to change the sales force dramatically. We're looking at opportunities. I think the key here is that we made the big investment in 2018 to hire and train the 13 sales reps that we have and the 5 clinical specialists, and the goal of '19 is now to leverage that and really focus their attention on deeper penetration in hospitals. Maybe look at the back half of the year, we might move that up a bit, but the plan right now is pretty much hold it steady.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [14]

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Okay. And lastly, if I may, do you expect any studies to be coming out over the coming couple quarters, as far as any data beyond information that you'll provide as far as your presub meeting with the FDA, as far as adding the pediatric indication?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [15]

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We have some physician-initiated studies that are under way right now, and we're supporting those studies and look forward to their publication, but I couldn't speak to exactly when that will happen simply because it's being managed by the physician and their institution.

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Operator [16]

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At this time, I would like to turn it back over to the speakers for any further comments.

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [17]

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Well, I want to thank everybody for joining our fourth quarter 2018 conference call and wish you all a very good day. Thank you.

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Operator [18]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.