AOTI, Inc. (AOTI) Earnings Call Transcript & Summary

Good morning, and welcome to the AOTI Half Year Results Investor Presentation. [Operator Instructions] Before we begin, we'd like to submit the following poll. And I would now like to hand you over to CEO, Mike Griffiths. Good afternoon.

Yes. Good afternoon. Thank you for joining us here. So I'm Mike Griffiths and CEO and our CFO here, Jayesh Pankhania, and we're going to be walking you through our midyear presentation here. Good morning, everyone. Good morning. So we'll go to the -- okay. So we'll walk you through. So this really is a transformational growth year for the company. And to remind everybody, we have a unique multi-modality therapy called TW02 wound option, and we are already the leader in the top option space. It's differentiated by not only its clinical utility, but also the fact it delivers longer, more durable healing of chronic wounds, which has significant cost and health economic benefits as well. We already are generating significant early revenues with strong profitable growth in the sectors that we're in. And the most sort of transformational news for the company is the impending CMS, which is the Center for Medicare and Medicaid Services in the U.S. coverage for the therapy, which was announced as a provisional local coverage determination in July of this year, which is now in a final process that will complete by July of next year. Our existing commercial infrastructure, we have been honing and making adjustments to such that we can maximize our footprint and improve our best practices to attain as much operational leverage as possible across the different segments we're able to do business in today, which will also prepare ourselves well for when this broader coverage is in play. And we are also unique in the fact that we're building an outcome-based home category within the advanced wound care space. And it's a unique thing with us that allows us to deliver and engage with patients, prescribers and other stakeholders, including payers, so that everything that we do in the patient's home, it demonstrates the same durable healing outcomes that we've shown through our extensive clinical trials. So jumping to the numbers here and the performance, and Jayesh will get into this in more detail in a second. We saw robust underlying profitable revenue growth of nearly 19%, well ahead of our peers in the Advanced Wound Care space. And remember, this is in the face of quite turbulent times in the U.S., particularly in the wound care space over this last year. We've gone through a number of organizational and operational changes to hone our sales structure and optimize our go-to-business practices, which are still in the process of being completed that will not only improve our sales performance in the short term, but we'll prepare ourselves for the future that's coming with this broader coverage. As I mentioned earlier, actually at the end of the period, but in July, CMS published the long-awaited coverage determination which was saying that public option is reasonable and necessary for treating Medicare patients and Medicare are the patients that are over 65, the elderly population, which, as you can imagine, have a broader prevalence of chronic disease. So a significant milestone and now it's working through that process to a final coverage determination and be availing ourselves to build patients. We continue with our market access progress, not only in the restructuring of the sales organization and holding our best practices, but also in increasing the number of states where we have Medicaid provider IDs. And unlike Medicare, Medicaid is the federal government programs for low income and for people with disabilities and has actually more enrolled lives, close to 80 million enrolled lives compared to Medicare. And again, we keep expanding to that sector so we can avail ourselves as those opportunities open, and it's a state-by-state administrative program. Last but not least, we -- our evidence base, which is second to none in demonstrating sustainable, durable outcomes has been bolstered by a very large real-world study of over 3,000 patients that demonstrated across all our extremity wounds, diabetic foot ulcers, venous leg ulcers, arterial wounds, et cetera, very consistent not only healing in non-healing wounds, but durable healing with significant reductions in reoccurrence over greater than 12 months. So again, we have an evidence-based second to none and a differentiated message clinically second to none. If we go to the business overview of where we stand, I just want to remind people a little bit about the opportunity. And in the U.S., particularly, but it's like this in most countries, the way health care is being delivered is by delivering economics associated with activity. So you provide services and you get paid for providing services to treat patients or treat diseases. In the U.S., they refer to that historically as fee-for-service. You get paid for what you do. And sadly, in some cases, you get paid for the more you do. And this has helped drive the [indiscernible] cost of the U.S. health care system, which are in excess of $5 trillion a year on health care spent on health care, which is more around the same GDP -- the same as the GDP of Germany and more than 25% more than the GDP of the United Kingdom. So huge amount spent on health care. And 90% of those costs goes to managing patients with chronic disease. So there's an enormous burden that's getting bigger and quite is unsustainable. So what the shift is what people want to move towards is outcome-driven economics or outcome-driven care. So you get paid for delivering better outcomes to patients and obviously, hopefully like ways to payers and you can reduce that health burden. We are uniquely positioned because we are as AOTI establishing an at-home platform that allows us to deliver these outcomes, and it's based around 3 very distinct pillars. The first is our unique differentiated topical reduction therapy, where we are delivering durable, synergistic healing with evidence second to none that shows not only durability and reduction in reoccurrence and resources, but consequently significant reduction in costs. We're also unique in the fact that we are an accredited home care provider. And when our therapy is ordered, we manage the patients, set them up at home. So we control the value chain all the way to the patients at home. And then the last component of that, which is key to our ability to scale is our eyes on the wound platform that allows us then with data analytics and AI-driven technology to engage more actively and proactively with patients and provide reports and information back to prescribers and to payers so that we can demonstrate on every patient what's written on the tin we deliver. So when we show these durable outcomes in studies, it's not just academic, we deliver on every patient and can really deliver then that value proposition back. And this creates enormous strategic advantage, but also incredible barriers of entry to others trying to follow. So what is the size of the market predominantly here in the U.S. Now if we look at a bottom-up analysis based on real claims, today, our service of penal market prior to us being able to build a broader Medicare and other associated coverage is focused on 2 sectors, the Veterans Administration nationwide in the U.S. and New York State Medicaid. So the Medicaid portion, as I said, is the low-income and disabled people, which get covered by government health care. If you look at that, that accounts for we estimate conservatively from a bottom-up difficult to heal lower extremity wounds, about 28,000 wounds. We have around 6,000 wounds, so less than 20% penetrated. So it's a $400 million opportunity that we have tons of upside. So us only improving our performance and execution in those sectors has lots of upside to grow in the short term and near term. With the decision now for Medicare to deem topical option reasonable necessary and the process of that coverage determination to complete and plus through the systems, this will open up not just Medicare but all other payer sectors -- and we believe we'll drive that then to an addressable market of about 1.8 million wounds or a 65-fold increase. So this is why it is transformative. It's an enormous multiplier of opportunity that we can then take advantage of. Also quite uniquely, we took a very phased approach to go-to-market in the U.S. And rather than wait until we have broader traditional Medicare coverage, which a lot of companies will do, we focused in on the Veterans Administration and New York State Medicaid first, where we've been able to get reasonable traction, as I said, just under 20% penetration today. So plenty of upside. What we've then been working on is our market access is expanding into more state Medicaid. Remember, the lower income portion, which can make decisions on their own in the state level prior to Medicare making nationwide decisions. for the over 65 population. And we were getting good progress and traction there. And this is where we've seen significant headwinds from the one big beautiful bill in the administrative students focus on ratcheting down support for Medicaid. So again, still part of our strategy, but certainly an area that has been constrained somewhat to date. With the news now of CMS coverage determination coming into play, which, as we said, statutorily has to complete as a final LCD by July 23 of next year, this will now open up access to not just the Medicare, the over 65, where there's the most prevalence of chronic wounds, but will also is used as a bellwether for all other payer groups and will help improve access to not just Medicaid, but commercial and other payers in the U.S. system as well. So it really is a transformative part of our strategy. This sort of articulates a little bit the process and the time line of where we are. And the process is the Centers for Medicare and Medicaid Services published a proposed local coverage determination and extent local, but it's all 4 of the regional local carriers publishing together, so effectively national coverage. It then went into a 45-day statutory public comment period. And as part of that, there was an open public comment meeting where there was universal support for the coverage determination, a very, very positive support indicating that they should move forward. They now have, as I said, statutorily a year from the date of that publication to finalize the local coverage determination and then there's another mandatory waiting period before the code becomes effective and billable. Obviously, in the background, during this period and potentially afterwards, they will be deciding on what level of payment. They will decide on how to flush it through as it codes into the fee schedule, et cetera. So there's work that goes on, and obviously, we will be working with our advocacy teams to maximize our input to support that process in the background. So again, a very clear definable time line to broad and more nationwide access. As we continue obviously to work in the background on market access, our focus is honing our commercial execution in the sectors today that we said that we have clear coverage policy, which is the Veterans Administration and particularly New York and New Jersey Medicaid. As we've announced before, we've made a number of changes to our sales and our commercial team structure. And one of them has been is to take what were sector-specific sales teams, either focused on the VA or focus on Medicaid and make it more geographic so they can focus on all the business that they can avail themselves to, be it Veterans Administration, be it commercial, Medicaid, et cetera, in their territories and honing them the best practices from our best performing reps so that we can improve productivity. And by productivity, we mean the number of patients each rep has on being serviced with our therapy every month. And we know that if we can improve productivity of our lesser performing reps even more to the median, which will move the medium up closer to our higher-performing reps, obviously, those productivity improvements will drop to the bottom line now, but we'll set ourselves up well with the same prescribers that we want to have ordering our therapy when Medicare comes along because it allows us to broaden our call points to those same prescribers. As I mentioned earlier, part of our platform, our eyes on the wound platform is a technological platform that allows us to manage engagements with patients to guarantee we deliver the outcomes, but also to demonstrate with data analytics that we deliver those outcomes to both the prescribers, so they see progress, but also to the payers that want to make sure that if you're doing things in the home care environment, patients are using it, so it's effective. This slide is really to sort of demonstrate based on just percentages of the population, how much these different segments mean in the U.S. If you look at where we are today, we're in the Veterans Administration and New York Medicaid. If you look at the population, that's less than 5% of the U.S. population. It's already a $400 million opportunity. With Medicaid, as we've been expanding more and more and now have 27 Medicaid states, we have the potential to grow significantly then in that sector. And with the Medicare predicate, we expect that now progressively to improve our access to Medicaid states. And then if you look at Medicare, Medicare is split between what they call fee-for-services where the federal government you bill and they pay you directly or Medicare Advantage, which are managed care insurers that manage those patients for the government, and it's not 50-50, but it's close to 50-50. And you can see we are looking at then when we will have access to those populations staged over time. And last but not least, there's also a commercial sector, which is regular insurers managing people predominantly that are working for companies, which have a lower proportion of chronic disease, but not none because it's a large number of patients. So over time, the Medicare coverage decision will progressively allow us to open up more and more of these sectors, and they will then come in, as you can see, and we tried to illustrate that going out from 2030 onwards, we should have access to pretty much all of these sectors to drive the business. So where play in 5% of the U.S. market, we play in 100% of the U.S. market. Now as I mentioned earlier, we have a sales infrastructure that used to be sector specific that's now geographic. So they're focused on in the geographies, you can see how they're distributed across the U.S. And it allows us to have some presence in about 27 states, which is consistent with the Medicare provider IDs. That touches about 80-odd percent of the U.S. population, the majority of U.S. population. So we are able -- if we can hone our practices and bring along prescribers in those different states with the current patient mix that we can service, those prescribers also then have Medicare patients. So such when Medicare is available to be billed, they were able to give us those Medicare patients because they have seen the outcomes and believe in the therapy. So all the work we do now and the honing of our best practices doesn't have just an immediate effect on performance and productivity and obviously, margins, but it will really pay dividends as we expand with broader Medicare coverage. Now just to finish off here, this is an illustration of what does this really mean? Well, the only other sort of analogy we have in the wound care space was KCI who were the developers and the introducers of negative pressure wound therapy back in the late '90s, early 2000s. And then end of 2000, they received their negative care coverage. And as you can see from that, there was quite exponential and explosive growth from that point, such within 5 years, they took themselves to effectively a $1 billion company and this product line sort of feed out just under $1.5 billion. And here we are now, to give you some idea, if you do it the right way, you have therapies that are effective, and we have far more barriers to entry with our outcome-based and homeoach than they have you can establish not only a very large business, but they have maintained that dominant position and that size of business even today, which is 26 years later, 25 years later, they are still the dominant player with a close to $1.5 billion product line around negative pressure. But again, it gives you some idea of what the potential is if we do execute effectively. So now I'll just pass it over to Jay to walk you through the financials. Thanks, Mike, and good afternoon, everyone.

So I want you to leave you with 3 key messages from this slide. We've had robust underlying growth of around 18.8%. Underlying means excluding our Arizona Medicaid segment, which we've ceased taking on new patients, and I'll come on to that in a little bit more detail. We've also had positive operating cash flow and improving net debt. and we've improved our EBITDA margins. So just to say on the revenue side, our reported growth was still very good at 10.8% and was driven by VA and Medicaid. Our EBITDA grew 16.6% to GBP 3.6 million, and our margin improved by 50 basis points to 10.1%. And that's driven by our revenue growth and our sales rep productivity that Mike talked about earlier, but also changes to the commission scheme to really drive the right behaviors and drive that top line, offset by investments to support future growth activities. On the operating cash flow side, we saw positive operating cash flow of GBP 0.9 million, which is an improvement from the same period last year, which was a GBP 4.7 million cash outflow. And that was driven by strong VA performance, which is paid on provision of service, so almost cash straight away, improved working capital in the form of better DSO and deferring inventory purchases into the second half, but also ceasing taking on new patients in Arizona from 1st of April '26, where Arizona is a Medicaid state that we have been unable to collect our billed revenue, and I'll come on to that in a bit more detail later on in the deck. Our net debt saw a slight improvement from the end of the year by $0.2 million to $6.3 million. So our cash is remaining relatively stable, and that's all due to the improved VA performance and working capital I mentioned earlier. Cash at June was $13.8 million compared to the year-end of $13.4 million. So in terms of the components of the underlying growth, the biggest contributor to growth is our VA business, which grew 16% and contributed $2.8 million of growth. That was driven by our commercial restructure, which has shown improvements in productivity since the same period last year, but also the impact of D we've seen abating as well and so the business is getting back to historical levels of growth. The second largest area of growth was our Medicaid business, which is primarily driven by New York and New Jersey Medicaid. That sector grew 21.5%, but our expansion plans are still hampered by the U.S. healthcare headwinds and the One Big Beautiful Bill Act. We're trying to get coverage in new states is taking much longer than we previously experienced. Our other segment, which is a nonmaterial segment, is contributed about $0.3 million to growth, and that primarily came from the U.S. Commercial segment. In terms of profitability, as I mentioned earlier, our EBITDA was $3.6 million at a 10.1% margin. And you can see that, that improvement has been primarily driven by revenue growth and improved gross margins. Our gross margins improved by 1.1%, and that was 2 main reasons for that. The first is that we're much more efficient at using our fleet of controllers and concentrators to deliver the service to the patients, but also better utilization of our consumable stock as well. The new commission plan contributed a bit to improving EBITDA as some reps missed their quotas. And in the new plan, if you miss your quota, you don't get the full commission rate that you would otherwise get. And that's offset by primarily investments to support growth in the future. So these are investments that will help us drive that top line once we get that CMS market access and that flushes out to the rest of the market. And those investments are investments in headcount, either in the sales rep community, but also areas to support sales rep and billing activities and things like that, but also other items like marketing and market access and product evaluations. I think one of the important observations on this slide is that you can see the operating leverage that we're going to get. If you weren't making those investments in growth, you can see that our profitability could be up to 20% rather than 10%. And as we scale, we should be seeing our profitability improve along those lines. In terms of cash flow and net debt, I've mentioned before, we have strong operating cash flow due to VA performance, improved working capital and ceasing the treatment of new patients in Arizona. We also had a lower capital expenditure than we had expected because of our more efficient utilization of our fleet of rental units. So the primary item on capital purchases there is our -- is on the wound development. And then we have a small accrual on our exit fee for our loan, which forms part of the reconciliation. So just talking about Arizona, for those of you who aren't aware, we've been in discussions with Arizona State Medicaid and Arizona insurers where we have not received payment for treatment of patients due to a whole lot of reasons that are impacting Arizona Medicaid, which have been caught up by cyber breaches, Medicaid insurer turbulence and CTV fraud and multiple Medicaid director changes. And we took the difficult decision on 1st of April to cease the treatment of new patients from Arizona Medicaid, and that helps to not have more of a working capital buildup and helps our cash position going forward. And I just want to say that we're working closely with the Medicaid -- Arizona State Medicaid agency for formal coverage policy for our therapy and to recover the historical claims going forward, and we're confident in collecting those that historical debt. Consequently, as a result of ceasing to take on new patients in Arizona Medicaid, we reached an agreement in September to revise our revenue and EBITDA covenants of our loan just to prudently bring them down because we're no longer going to get revenues from Arizona going forward. And then finally, for the outlook for the rest of the year, I just wanted to say 2026 is a transformative year for us. We received the draft LCD from CMS, and we're expecting as we're going to move towards the final LCD within the 365-day period. And that will really open up the market for us, as Mike mentioned, we've also been optimizing our sales structure to deliver the full potential of that market opportunity. So for the full year, we're expecting our 2026 EBITDA to be in line with current consensus, which is $6.8 million as at 29th of September, and we're confident with our net debt and cash outlook for the full year. We're expecting to continue our top line growth in line with our guidance set at the time of our FY '25 results, and that's underlying mid-teens growth, excluding Arizona Medicaid or low single-digit growth on a reported basis. I'll now hand back to Mike just to say some closing comments.

Thanks, Jeff. So just to summarize, I mean, this is a very exciting time for the company. The long-awaited and the transformative or transformational growth driver, which is the broader Medicare coverage and what that does not only to avail ourselves to the Medicare, the 65 population, but also opening up access to broader other payer groups like the Medicaid and commercial payer insurer that gatekeeper means this opportunity grows exponentially 65-plus fold in the coming few years as that finalizes and flush through the system. What we are doing is honing our ability to do business and involving and rolling out technology in our eyes on the Wound platform to maximize our ability to proactively engage with patients to interact with digital architecture back to the patient record and to demonstrate to both payers and clinicians that when we deliver durable outcomes in studies, we actually do that in the real world and that true clinical and cost saving benefits are really realized on every patient. This separates us apart from other players in the space and open up enormous opportunity as we're in the patient's home to help manage their comorbid conditions in the future. So with that, I think we will finish the presentation, and we will go to the Q&A.

I would like to remind you that recording of this presentation along with a copy of the slides can be accessed dashboard. Mike, if I may just hand back to you to take us through the Q&A, and I'll pick up from you both at the end. Thank you.

So there was a question regarding about what Medicare is going to pay for the therapy. That's a very valid question. And it highlights that we're currently -- if you look at where we are today, we are reimbursed under the total supply schedule contract in the Veterans Administration around $3,100 per month of the therapy. That really acts as a backstop because that is over nation pricing and Medicare usually will not go there and they certainly can't go below that. So that's a backstop. In every other sector, including the significant business we have in New York and have had in Arizona and certainly have still in New Jersey and other states, Medicaid with managed care insurers with the commercial contracts we have in business with Cigna and now beginning with Blue Cross Blue Shield in the Northeast, our reimbursement is nearly always around double or more than that. So obviously, what we will be advocating for in the process through various channels is reimbursement consistent with the prevailing rates in the marketplace. And our expectation it will be somewhere between the VA price and that price, but that has yet to be determined. And as you can see, that's part of what will happen between now and the finalization of the LCD -- regarding fee-for-service and insurers, generally, the pricing will be consistent across because once Medicare sets a fee schedule price, then the insurers follow that. They don't have to follow it for the commercial sectors and other sectors, but certainly, they would for Medicare. And it also sets a precedent that Medicaid states may or may not follow at their discretion. So okay. What is the maximum patients we can think to? So we're saying it's currently, I highlight here around 20. So that's our average patients per rep. We think that, that has the ability to stress significantly. If we look at the highest performing reps, they are producing as much as 5x as many of that. And so obviously, that we don't expect everybody is going to be as good as the best. But we certainly believe the ability to drive the average and potentially double that in the future overnight is very reasonable. And that is without Medicare. But this is our underlying performance in the current environment. Once broader coverage comes and as you remember, most of these prescribers, the majority patients that they would have will be Medicare. If we do our job to deliver outcomes and prove the therapy's effectiveness to prescribers, -- those prescribers become, as we tend to refer them, not just doctors, but they become sticky prescribers that want to give you more patients. And the majority of patients they generally have will be Medicare. So when they're able to give you those patients, if they believe in the therapy, the likelihood they will, in which case, we could see a significant growth in productivity even due to that. So we believe there's the ability to significantly compound the improvements in productivity from where they are today. The more we do today obviously has immediate effect on performance and what drops to the bottom line. And that will only, we believe, get better with a higher average reimbursement, but also with more patients per average moving up. How superior is our therapy? Okay. When you look at our therapy, we demonstrate in both our randomized controlled trials and our real-world data now very large 3,000-plus patients that we not only heal, we heal 6x more effectively than standard of care, which is certainly better than other adjunctive advanced wound care modalities. But we're the only one that can also demonstrate in both randomized trial and large real-world data that we have as much as a sixfold reduction in reoccurrence over 12 months or longer with over 80% reduction in hospitalizations and 70% reductions in amputations during that same time period. So we're very unique in the fact that we can deliver these durable outcomes. And it's due to the multimodality intermittent cyclical pressure approach that we have that's unique to us. So very, very differentiated from other topical option therapies and other therapies in the wound care space.

So there's a couple of questions on recovering receivables from Arizona. And I think particularly around sort of timing of recovery. I think it's really difficult to say timing. I think that we are confident of recovering that debt. It's a complex situation, and we're working with Arizona Medicaid to provide both coverage going forward, but also helping us to recover that debt as fast as we can. do the reps might be the prospective patients?