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Edited Transcript of VAPO.N earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Vapotherm Inc Earnings Call

Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Vapotherm Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Landry

Vapotherm, Inc. - CFO, VP, Secretary & Treasurer

* Joseph F. Army

Vapotherm, Inc. - CEO, President & Director

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Conference Call Participants

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* Anna Marie Nussbaum

William Blair & Company L.L.C., Research Division - Associate

* Cecilia E. Furlong

Canaccord Genuity Corp., Research Division - Associate

* Kyle Andrew Pezzi

BofA Merrill Lynch, Research Division - Analyst

* Marie Yoko Thibault

BTIG, LLC, Research Division - Director & Digital Health Analyst

* Mark R. Klausner

Westwicke Partners, LLC - Managing Partner

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Third Quarter 2019 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.

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Mark R. Klausner, Westwicke Partners, LLC - Managing Partner [2]

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Good afternoon, and thank you for joining us for the Vapotherm Third Quarter 2019 Financial Results Conference Call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army; and its 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 covered under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. 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, 2018, which was filed with the Securities and Exchange Commission on March 22, 2019, and in any subsequent filings with the Securities and Exchange Commission. 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 acceptable accounting principles or GAAP. We 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.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [3]

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Good afternoon, and thank you for joining us today. I will begin by discussing the progress we made in 3Q, then I will hand the call over to John Landry, our CFO, to provide the financial details of our 3Q 2019 results and our revised guidance. After which, I will update you on our key areas of focus for the balance of 2019 before taking questions.

I'm generally feeling pretty good about how we're doing in building the company despite the shortfall in U.S. capital revenue in the quarter. Big picture, total revenue grew by 15% led by 24% growth in disposables. Gross margins were nearly 45%, and our cash burn improvement program is making progress. Operationally, our expanded field sales force is coming along nicely. Our installed base is tracking to plan. Our ED guarantee program is gaining traction. Disposable turn rates are strong year-to-date, and our product development efforts are all progressing according to plan.

I mentioned last quarter that some of our legacy U.S. sales professionals had not been performing to their capital sales program. I'm pleased to report that this quarter, nearly 2/3 of these legacy tenured sales professionals grew their installed base according to our plan. In addition, last year's expansion class of sales professionals continued to develop in line with our expectations as they progress towards their 1-year anniversary. We like how our sales pipelines are building as they take multiple quarters to build and are the key to increasing our installed base.

Despite all these positive signs, we came in below our U.S. capital revenue expectation for the quarter. The primary reason for this shortfall was the mix of sold versus placed capital units. During 3Q, we saw a higher percentage of placed units compared to sold or leased units than we were expecting, and as a result, we saw lower-than-expected capital revenue in the U.S. by approximately $400,000. However, we were very pleased when we looked at the total number of units put into the field in the U.S., whether those units were sold, leased or placed. We have continued to see our installed base grow in line with our expectations. Since 3Q of 2018, we've seen a greater than 1,400 unit or a 14% increase in our active U.S. installed base. As I've shared with you in the past, the growth of our installed base is the metric that I focus on the most as this is a key driver of our high-margin recurring disposables revenue.

Our focus on the ED continues to progress well, and Hi-VNI Technology is now being used in nearly 300 of the largest EDs around the country. This quarter, our U.S. sales professionals focused on educating customers about our ED guarantee program. And in the quarter, we signed over 60 of these agreements. As a reminder, under this program, if a BiPAP-intolerant patient is placed on the Precision Flow system and fails, we refund or replace the disposable. We believe it's unique in the market, and it's a powerful tool as we continue to change clinical practice and replace the 20-year gold standard. We're tracking the results from this program, and we intend on publishing this data to add real-world experience, in addition to the growing body of compelling clinical data that we previously released.

Recall that our third quarter is the slowest quarter of the year. Our disposable turn rates came in at 1.66, which is roughly our historical 3-year average. Importantly, our ED accounts continued to consume disposables at a higher rate than our non-ED accounts. As we continue to open more of the large ED accounts, we see the potential for the overall turn rate to edge upwards. We're continuing to forecast with our historical turn rates for the foreseeable future until we establish a new baseline for both sold and placed capital units.

Our gross margin improvement plan continues to work as planned. Our three-pronged game plan to improve gross margins is simple and well understood by our entire company: selling higher clinical value products; reducing direct product costs; and decreasing our overhead rates per unit produced. We've continued to deliver in 3Q, while we have been working steadily to set ourselves up for 2020 and beyond.

The oxygen-assist module project, which we formally refer to as IntellO2, also made good progress in 3Q. Recall that oxygen is a dangerous life-sustaining drug with a narrow therapeutic window. The oxygen-assist module will help the clinician to keep the patient in the targeted oxygen saturation range. We continue to expect to receive the CE mark on the oxygen-assist module in 4Q and are developing our European limited market release plans, which we expect will occur late in 4Q or early in the first quarter 2020.

In the U.S., we expect to file an IDE with FDA for the U.S. clinical trial later this year and have determined the clinical study sites that will participate in this important trial.

Three quarters of the way through the year, we're feeling good about the business and the work we are doing to set our company up for continued success in 2020. While I was disappointed to miss on our U.S. capital equipment revenue, we're encouraged that we kept the installed base growth on track, which sets us up to continue to grow margin and recurring disposables revenue.

Gross margins are nearly 45%, and our cash burn improvement plan is beginning to yield results. Operationally, the ED focus is working. Disposables revenue growth and turns have been strong year-to-date. We anticipate full market release of new disposable products in 2020, and the oxygen-assist module development efforts are on track.

Now I'll turn it over to John Landry, our CFO, to provide a financial review. John?

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John Landry, Vapotherm, Inc. - CFO, VP, Secretary & Treasurer [4]

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Thank you, Joe.

Revenue in the third quarter of 2019 was $10.8 million, representing a 15.1% increase over revenue of $9.4 million in the third quarter of 2018. Total U.S. revenue was $8 million, representing an increase of 6.6% over the third quarter of 2018 primarily due to a 16.2% increase in disposable revenue as a result of a larger installed base of Precision Flow units and higher average selling prices. This increase in disposable revenue was partially offset by a decrease in revenue generated from the sales of Precision Flow units on a year-over-year basis.

Total international revenue was $2.8 million, representing an increase of 49.8% over the third quarter of 2018 primarily due to an increase in disposable revenue as a result of a larger installed base of Precision Flow units and higher average selling prices and, to a lesser extent, increases in service and other revenue.

Capital revenue, including revenue from both product sales and lease revenue, was $2.5 million in the third quarter of 2019, representing a 7% decrease over the prior year. U.S. capital revenue was $1.9 million as compared to $2.1 million in the third quarter of 2018 primarily due to fewer sales of Precision Flow units and, to a lesser extent, slightly lower average selling prices. International capital revenue was $647,000 in the third quarter of 2019, an increase of $77,000 over the third quarter of 2018.

Disposable revenue was $7.8 million in the third quarter of 2019, representing a 24.3% increase over the third quarter of 2018 and was primarily driven by an increase in our worldwide installed base of Precision Flow units and higher average selling prices. During the third quarter of 2019, we sold roughly 79,000 disposables worldwide. Disposable revenue was $6 million in the U.S. compared to $5.1 million in the third quarter of 2018, representing 16.2% growth year-over-year. Disposable turn rates were consistent in the U.S. on a year-over-year basis, while average selling prices increased roughly 2%. International disposable revenue was $1.9 million compared to $1.2 million in the third quarter of 2018, representing growth of nearly 60%. Disposable average selling prices and our turn rates in the international markets were both higher on a year-over-year basis.

Worldwide service revenue was $464,000 in the third quarter of 2019. Of this amount, $202,000 was generated in the U.S., and $262,000 was from international markets, which increased due to greater service revenue generated in the U.K.

Gross profit in the third quarter of 2019 was $4.8 million, an increase of $1.2 million over gross profit of $3.6 million in the third quarter of 2018. Gross margin was 44.5% in the third quarter of 2019 compared to 38.5% in the third quarter of 2018. The increase in gross margin was driven by a decrease in disposable component cost in comparison to the third quarter of 2018, reduced overhead rates per unit, a favorable sales mix of disposables and increased average selling prices.

Research and development expense was $3.3 million in the third quarter of 2019, an increase of $1.5 million over the prior year. The increase in research and development expense was primarily due to new product development costs associated with our oxygen-assist module and next-gen Hi-VNI platform and, to a lesser extent, an increase in research and development personnel-related expenses.

Sales and marketing expense was $9.2 million in the third quarter of 2019, an increase of $1.4 million over the prior year. The increase in sales and marketing expense was primarily due to the fourth quarter 2018 U.S. sales force expansion and corresponding compensation, travel and employee-related expenses and other sales and marketing initiatives.

General and administrative expense was $4 million in the third quarter of 2019, an increase of $1.2 million over the prior year. The increase was primarily due to public company-related costs, including increased head count, employee-related expenses, legal, advisory and consulting fees.

Net loss in the third quarter of 2019 was $12.8 million or $0.65 per share compared to $9.5 million or $10.90 per share in the third quarter of 2018. Adjusted EBITDA for the third quarter of 2019 was negative $10.7 million compared to negative $8 million in the third quarter of 2018. Adjusted EBITDA adjusts for foreign currency gains or losses, net interest expense, changes in the fair value of warrant liabilities, depreciation and amortization expense and stock-based compensation. The $2.7 million increase in adjusted EBITDA loss in the third quarter of 2019 was primarily due to higher operating expenses, partially offset by higher gross profit.

As of September 30, 2019, cash and cash equivalents were $83.5 million compared to $46.1 million as of the end of June 2019 and $58.2 million as of the end of December 2018. We completed a follow-on offering in August, resulting in net proceeds of $48.3 million, including the underwriter's option to purchase additional shares, which was exercised in full.

In the third quarter of 2019, our cash burn was $10.6 million, an increase of $800,000 from the second quarter of 2019 due to R&D expenses of $1.1 million related to our oxygen-assist module and next-gen Hi-VNI product. But our cash burn in the third quarter 2019 does reflect a decrease of $500,000 from the first quarter of 2019. Please note, this cash burn calculation excludes the impact of the Solus acquisition in the first quarter of 2019, each quarter's debt activity and the net proceeds from our recently completed follow-on offering.

Now turning to guidance. For the full year 2019, we now expect revenue to be between $47.1 million and $47.6 million, which represents a year-over-year increase of 11% to 12%. This full year revenue guidance reflects a decrease from our prior guidance of $49 million and $51 million due to lower-than-expected U.S. capital equipment revenue.

For the full year 2019, we now expect gross margin to be in the range of 43% to 44%, an increase from our prior guidance of 42.5% to 43.5%. We continue to expect annual operating expenses to be in the range of $68 million to $70 million.

For the fourth quarter of 2019, we expect revenue to be between $12 million and $12.5 million, representing growth of 3% to 7% over the fourth quarter of 2018.

This concludes my remarks. I'll now turn it back over to you, Joe.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [5]

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Thanks, John. Before opening the line for questions, I'd like to review how we intend to focus our efforts over the balance of the year. First, we're expanding our U.S. sales channel by 10%, from the 52 territories at the end of 3Q to 57 territories by year-end. This has gone smoothly to date, and we like the quality of sales professional candidates we're seeing.

Secondly, we're focused on preparing for the full launch of our new disposable products. We are wrapping up a limited market release of our new ProSoft line of next-generation Hi-VNI Technology patient interfaces. These cannulas are comfortable, lightweight material that ensure minimal, gentle contact with the skin. We are also in the midst of the limited market release of our integrated aerosol drug delivery Hi-VNI disposable. This product can help clinicians deliver continuous nebulization of drug with our Hi-VNI Technology, which could be especially helpful to them during the upcoming RSV season.

I've already spoken a bit about our oxygen-assist module for the Precision Flow. We expect to receive the CE mark by the end of the year, and we'll be focused on beginning the limited market release in a handful of European countries, including our newly direct U.K. market, as soon as this clearance is received. During the limited market release, we will test several business models, including sales, rentals and placements of the oxygen-assist module. Early indications from our prelaunch work suggest this technology may help us open net new accounts. The only caveat to this time line relates to the transition of the European regulatory model from the previous Medical Device Directive to the new Medical Device Regulation. This change could potentially lead to the approval process spilling over into 1Q of 2020.

As mentioned earlier, we are planning to start a U.S. clinical trial over the next couple of quarters, depending upon the timing of our IDE approval. We also intend to continue with the development of our next-generation Hi-VNI platform. Recently, we've received 510(k) clearance for the first iteration of this product. While we're pleased to achieve this significant milestone, recall that this clearance is just a step in the development process towards the clearance of our commercial product, which we expect to occur in 2020.

Turning to our growing and compelling clinical and economic data set, the ambulation study was recently published in the Journal of Clinical Respiratory Diseases and Care, supporting the feasibility of using Hi-VNI Technology with the Vapotherm Transfer Unit for ambulation of inpatients. We're also continuing to develop the clinical proof of Hi-VNI Technology as compared to BiPAP among hypercapnic patients.

Our final area of focus is the continuous effort to improve our gross margin. We like what we see for the remainder of the year, and we intend to keep running the same three-pronged play to drive gross margin improvement that has been working well to date. We're now shifting our focus to putting the pieces in place that will support 2020's gross margin improvement plan. An important part of this plan will be the new disposable products that I discussed above. We anticipate full market launches early in 2020 for these products, which we believe will offer great clinical value for our customers.

The more you as investors understand what we do and how we make the clinicians and patients feel, the clearer you will understand the opportunities and challenges in front of us as we attempt to change clinical practice. To provide you with a little more insight into this, I want to share a patient story with you from last quarter from 1 of our teammates in the Northeast.

Last Monday, we were starting an implementation. One of the respiratory therapists came up to the office, frantically looking for an alternative mask as the patient was not tolerating BiPAP. This was an elderly woman in congestive heart failure. We suggested Precision Flow, and the RT initially declined, saying, "They're just going to intubate her." We assured her of our support. She was very nervous. We went down to the Emergency Department with her and spoke with a physician who gave the respiratory therapist the go-ahead. The patient's son was pleading with his mom to cooperate, because he knew what the tube would mean for his elderly mom. She was coughing and gagging with the respiratory rate in the high 30s. Within 5 minutes of being on Hi-VNI Technology, she was asleep, and her respiratory rate was in the low 20s. Her son was crying tears of joy and thanking us. This patient was discharged a few hours later to the telemetry unit and weaned off to 4 liters nasal cannula by Wednesday afternoon. She avoided the ICU altogether.

In conclusion, I'm feeling good with how we're doing despite the shortfall in U.S. capital revenue for the quarter. Our installed base is tracking, disposables grew by 24%, and they now represent over 70% of our revenue. Gross margins were nearly 45%, and the expanded sales force is coming along nicely. Thank you for trusting us with your capital. It means a lot to us. Now I'd like to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Robert Hopkins with Bank of America Merrill Lynch.

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Kyle Andrew Pezzi, BofA Merrill Lynch, Research Division - Analyst [2]

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This is Kyle Pezzi on for Bob. I just had a quick question about the capital environment in the United States. Obviously, it came in a little bit weaker than we had expected this quarter, and it sounds like ASP was a little bit lower. Just wanted to make sure that I understand, is there anything thematic going on there that's worth calling out? And then I just have a quick follow-up after that.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [3]

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No, Kyle. Before John gets into the details, I just want to remind you that our primary focus is on the long-term growth of that installed base, and that's tracking in line with our expectations. Installed base is the metric that I focus on the most. This is the key driver of our high-margin recurring disposable revenues. Worldwide, that installed base grew 18.5% or just over 2,400 Precision Flow units, and it now is over 72% of our overall revenue comes from disposables.

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John Landry, Vapotherm, Inc. - CFO, VP, Secretary & Treasurer [4]

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Yes. So Kyle, I can add a little more color here in terms of the third quarter. Approximately $450,000 of the shortfall between the midpoint of the range and where we came in at was attributable to a shift in the number of units that we placed at customers versus selling directly to the customers. So you take that number times our average selling price, that's roughly the delta between the midpoint of the guidance and where we came in at.

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Kyle Andrew Pezzi, BofA Merrill Lynch, Research Division - Analyst [5]

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That's helpful. And then I guess in terms of kind of growth rates as we think about next year and look at historical trends, what would it take to get to that mid-teens to high-teens rate that we have seen historically? Do you expect growth rates to kind of be on this lower end for the next few quarters and then accelerate from there? Just any kind of broad comments are helpful.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [6]

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Well, I would say, broadly speaking, the thing that I pay attention to, again, is that installed base. The disposables grew 24%. It's now 72% of our total revenue base, Kyle. And what I'm going to just stay laser-focused on is just keep expanding that installed base, whether it be through placements, sales, leases, those 3 elements are really how we drive it as well as through the expansion of that sales force, which we expect to have that fully completed by the end of this quarter, by the end of December. And then lastly, accelerating that revenue growth through the use of the next set of new products that we're coming out with, both the ProSoft as well as the aerosol specialty disposable we're pretty excited about. Those are the types of things that we're looking at continuing to drive our growth.

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Operator [7]

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Our next question comes from Anna Nussbaum with William Blair.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [8]

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This is Anna on for Margaret. I just wanted to follow up on the 18.5% growth in the installed base despite the lower-than-expected total system sales. I -- and with the disposable utilization probably pretty predictable on those placements, can you speak to the ROI and implied growth out of those placements? And then what you expect for the installed base growth going forward as well?

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John Landry, Vapotherm, Inc. - CFO, VP, Secretary & Treasurer [9]

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Sure. Anna, it's John. So in terms of the installed base growth was 18.5%, and what we find is generally that the installed base growth is a fairly good indicator of our disposable growth going forward. So when we look at the installed base growth year-over-year, last year was roughly 18%, 19%, and our disposable year-over-year growth this year is going to be roughly 21%. So we find that to be a pretty good indicator of the future events of the disposable stream. In terms of the placement and the economics on that capital, in terms of the return on invested of that -- return on investment of that invested capital, generally, based upon the average selling prices and our cost structure, we can receive a cash-on-cash return on that invested capital in roughly 1 year.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [10]

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Okay. Got it. And then you talked a little bit about the ED -- or your strategy on the ED. How did that play out in the quarter relative to expectations? And I guess just in terms of growing that program, how has it benefited overall?

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [11]

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Well -- this is Joe. I'll take that one. So that ED guarantee program, we substantially exceeded our internal expectations around that. It really has helped us to start conversations with ED clinicians. When we offer a money-back guarantee to hospitals, if a BiPAP-intolerant patient goes on our technology and then fails, we believe that it breaks down an initial barrier for us in that sales cycle. And remember, we are working to displace a 2-generational technology that everybody has been trained on in the Emergency Department as the go-to for every respiratory distressed patient. The ability to put our money where our mouth is, is a pretty powerful message. And to date, we've sold almost 3,700 disposables under that program, and we've only had a handful of disposables returned to us. So this is a very interesting differentiator. I can tell you that our sales professionals really like this. They understand how to use it, and they're getting better and better at it in engaging fully with those ED physicians.

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Operator [12]

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Our next question comes from Jason Mills with Canaccord Genuity.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [13]

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This is actually Cecilia on for Jason. I just wanted to ask about gross margins that continue to come in ahead of our expectations, partially driven by the strong recurring revenue. But I was just wondering if you have updated thoughts just on your ability to continue to expand margins going forward, if you're still targeting the 200 to 300 basis point expansion you talked about previously and then just also the impact the oxygen-assist module could have on gross margins going forward.

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John Landry, Vapotherm, Inc. - CFO, VP, Secretary & Treasurer [14]

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Sure. So -- Cecilia, it's John. I'll take this one here. So in terms of the gross margin improvement, we did have 600 bps of improvement on a year-over-year basis. We're happy to report that all 3 elements of our three-pronged play are working. Of that improvement, roughly 20% to 25% of that year-over-year improvement was tied to a change in mix, as you pointed out, to higher recurring disposable stream. But the remaining 75% to 80% were tied to the 3 key elements of our three-pronged approach, which is cost reductions in our disposable, taking direct material labor out; reductions in our overhead rates per unit as we continue to scale; and then the last piece is our ASP increases. So we like what we see. We haven't set or haven't offered guidance yet for 2020, but we have communicated the 200 to 300 bps of improvement on a year-over-year basis, and we like what we see there right now.

In terms of the oxygen-assist module, I think it's a little bit premature just to comment on what that could potentially do to our gross margins going forward, but it is an important part of increasing the average selling prices of our technology as we drive more clinically valuable technologies into the hands of our customers. And we're also looking to -- with that, to have a more streamlined disposable as well as capital unit, which would, again, go hand in hand with reducing the overhead rates per unit as we build more and then the direct material and direct labor cost reduction initiatives. So it plays a very important part in that going forward, and we'll provide more commentary on the 2020 guidance in the year-end 2019 results call.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [15]

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Great. And then I just wanted to ask as well on the sales force, the turnaround you've seen that you highlighted in Q3, just if you could provide any more qualitative comments around what you're seeing, but then also your updated thoughts around peak productivity levels going forward with this new rep profile versus your prior expectations with the older rep profile.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [16]

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Well, I've been very lucky to be able to be in the field with a number of our sales professionals in the last quarter. And in fact, I was out with one of our more recent additions to our team last week in Colorado. And I can tell you, what I'm noticing is that the noise in our field organization has settled down. Our leaders have done a really good job at helping them understand where we're going to grow this business and working through all of the structural changes that we made to that organization a year ago. It's important to remember that 75% of our field organization has less than 1 year experience under their belt with us. The majority, the vast majority of these folks now are tenured, seasoned medical device sales professionals. But the B2B sales professionals that we have with us that have come up through the ranks have done an outstanding job as well. So I will tell you, I'm just -- I'm really, really proud of the entire team. I really like what I'm seeing. They're settling right down. I like what I'm seeing out of our field leaders. And our clinical team, in particular, has done an outstanding job at serving customers. So I guess that's about all I'm going to say on that topic.

And in terms of what peak productivity is going to look like, I don't think that I'm prepared to discuss that at the moment. I think we might have more thoughts on that in 2020. We're going to have these guys go out there and run a little bit and see how they do. But I'm liking what I'm seeing.

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Operator [17]

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Our next question comes from Sean Lavin with BTIG.

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Marie Yoko Thibault, BTIG, LLC, Research Division - Director & Digital Health Analyst [18]

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It's Marie Thibault on for Sean today. Just a couple of quick questions. I don't think we've had the chance to see Vapotherm's purchasing patterns and revenue cadence around a really strong flu season. So I wondered what your thoughts are. We're hearing from some that this could be a pretty strong flu season. So wondered what you're hearing in the field on that in terms of how we should think about kind of capital and disposable cadence around that.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [19]

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Well, how about if I take the first part around the flu season, and then Johnny can talk to you a little bit about the overall cadence of the rate between disposables and capital? We've heard the same thing. Out of Australia, our Asia Pac leader has been sharing with us that this was a -- what they would characterize as a moderate to severe flu season in the Southern Hemisphere. They've characterized the type of flu that they've seen is consistent with what we saw in 2017 in the U.S. Sometimes the Southern Hemisphere is a really good predictor for the U.S. flu season, and sometimes it's not.

One of the things that was characterized by the Southern Hemisphere flu season this year was that it began a bit earlier than historically. I can tell you, in looking at the CDC flu report, which they publish weekly on a 1-week lag, we're beginning to pick up signs of the flu in the U.S., but it's still very, very early in the season. And it would be much too soon to make any kind of prognosis around the type of flu that we're going to see. Because like I said, sometimes the Southern Hemisphere thing translates, and sometimes, it doesn't. That said, we're coming into our busy season now, fourth quarter and first quarter, from a census point of view in the acute care facilities in the Northern Hemisphere, are the busiest. It's when our turn rates are the most robust. Also it's also when the respiratory department tends to be heard the loudest when they are looking for more capital equipment investments.

John, anything you want to add to that?

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John Landry, Vapotherm, Inc. - CFO, VP, Secretary & Treasurer [20]

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I think that covers it, Joe. In terms of the turn rates, Marie, the third quarter is, as Joe said, our seasonally slowest period of time from a turn rate perspective. 1.67 was our rate for the third quarter. As we look to the fourth quarter, we're more aligned around the 2 turns per month from a disposable utilization perspective. And as you recall, obviously the first quarter of the year is the most robust from a turns perspective, about 2.2 turns. We use the lower of the prior year or the historical average to determine our turn rates, and will continue to do so to eliminate some of that volatility that we see in the variety of flu seasons as they occur.

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Marie Yoko Thibault, BTIG, LLC, Research Division - Director & Digital Health Analyst [21]

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Great. My other question was around palladium and the 510(k) clearance during the quarter, I believe, for the gen 1 device there. Can you tell us a little bit more about the road map for that or what you're willing to say publicly about that?

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [22]

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I could tell you why we did it. We hadn't had a full-blown 510(k) in front of the agency in quite some time, and it was a way to mitigate risk with a commercial version of our next-generation Hi-VNI system. We were very pleased with the process that we went through with FDA. It was a very robust one. And now we feel very good about what's going to come next when we submit the 510(k) for that next-gen commercial version. As John mentioned on the call earlier, we will be bringing that into a limited market release in 2020, although it will be late in the year, and we're pretty excited about that. We think that could be a very important tool for hospitals to use throughout their care continuum.

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Operator [23]

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That concludes our question-and-answer session for today. I will now turn the call back over to Joe Army for any closing remarks.

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Joseph F. Army, Vapotherm, Inc. - CEO, President & Director [24]

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Thanks 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.

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Operator [25]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.