Myomo, Inc. (MYO) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Myomo Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kim Golodetz. Please go ahead.

Thank you, operator, and good afternoon, everyone. This is Kim Golodetz with LHA. Welcome to the Myomo Second Quarter 2023 Conference Call. Earlier today, Myomo issued a news release announcing financial results for the 3 months ended June 30, 2023. If you would like to be added to the company's e-mail distribution list to receive future announcements, please register on the company's website at myomo.com or call LHA at (212) 838-3777 and speak with Carolyn Curran. With me on today's call from Myomo are Paul Gudonis, Chief Executive Officer; and Dave Henry, Chief Financial Officer. Before we begin, I'd like to caution listeners that statements made during this conference call by management other than historical facts are forward-looking statements. The words anticipate, believe, estimate, expect, intend, guidance, outlook, confidence, target, project, and other similar expressions are typically used to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and may involve and are subject to risks and uncertainties and other factors that may affect Myomo's business, financial condition, and operating results. These and additional risks, uncertainties, and other factors are discussed in Myomo's filings with the Securities and Exchange Commission, including the Form 10-Q for the quarter ended June 30, 2023, and subsequent filings. Actual outcomes and results may differ materially from what's expressed in or implied by these forward-looking statements. Except as required by law, Myomo undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. It is now my pleasure to turn the call over to Myomo's CEO, Paul Gudonis. Paul, please go ahead.

Thanks, Kim. Good afternoon, everyone, and thanks for joining us. As we reported in our earnings press release, we had a very solid quarter with year-over-year growth in revenue and in all of our key operating metrics. More specifically, we continue to increase shipments of our MyoPro device and to build our patient pipeline for future revenue growth, now including Medicare Part B patients. We received the final license payment for our joint venture in China, which has enabled the launch of the business there. And most importantly, we had a significant positive development in our efforts to secure Medicare Part B coverage for our powered arm brace so that we begin serving this large patient population. I'll start by reviewing the operational highlights during Q2 from the frontend of the pipeline due to delivery and revenue. Our direct-to-consumer marketing strategy of using TV advertising and social media to inform patients and family members about the MyoPro to restore movement in paralyzed arms is working very well. We added more than 400 medically qualified patients to the patient pipeline in the second quarter, and these candidates are all covered by insurance plans that have paid for MyoPro in the past. Earlier this year, we began focusing on payers that have a track record of reimbursing for the MyoPro resulting in what we believe is a higher-quality pipeline than in the past, and we're building it more efficiently with the smaller staff this year. We obtained authorizations and orders for 125 devices during the quarter, which is up 23% from the year ago quarter. And with the shipments and payments we received, our product revenues are up 15% year-over-year. In addition to this product revenue, we were paid the final installment of the China joint venture initial license fee of just over $1.7 million, bringing our Q2 total revenue to $6 million. We've been working on this joint venture for several years now and with the COVID-19 pandemic winding down and the resumption of economic activity in China, our joint venture partners, Ryzur Medical and Chinaleaf ventures were able to move constantly forward to fund Jiangxi Myomo, and we're now in the process of setting up manufacturing and sales operations to serve the Greater China market. With an estimated 14 million people with paralyzed arms and 2.5 million new strokes each year, China represents the world's largest market opportunity for the MyoPro. We have a joint venture project team that's assisting in preparing the manufacturing infrastructure, establishing the supply chain for components and engaging rehab hospitals for distribution of the MyoPro to patients. We sent a couple of our clinical specialists to China to train the JV staff and to demonstrate the technology to rehab hospital therapists. We've also received a total of about $300,000 in orders for the clinical version of our product called the Mobile Arm Rehab Kit to be used for demos and training and for the MyoPro control system chips and software, which will be used in the initial production run by the JV. The MyoPro control system order represents the initial purchase commitment under the guaranteed minimum payment provision of the JV contract. And this contract provides for a total of $10.75 million in MyoPro control unit purchases over the next 10 years. And I also want to note that these components are manufactured in the U.S. in our IP space firmly with Myomo. And then on June 30, the Centers for Medicare & Medicaid Services known as CMS, issued a proposed rule that if adopted would reclassify the MyoPro as a covered benefit in the brace category with a lumpsum payment. In addition, CMS stated its intention to post a fee for the MyoPro at an upcoming public meeting. This is a very significant development because it allows to serve patients in the U.S. who are covered by standard Medicare or Part B fee for service and would allow the MyoPro to be reimbursed on a lumpsum basis the way all the other payers in the U.S. currently pay for the MyoPro. We currently provide the MyoPro to seniors of certain Medicare Advantage plans, yet half the seniors in the U.S. are covered by Part B, so our addressable market is poised to increase substantially. For those of you who are new to Myomo, here's a quick summary on Medicare. In January 2019, CMS made unique product billing codes referred to as HCPCS codes effective for the MyoPro. However, CMS classified the MyoPro as durable medical equipment or DME, which classified it as a device to pay on a monthly rental with coverage on a case-by-case basis. While this opened up the large Medicare Advantage patient population to us, our position has been that the MyoPro is a custom-fabricated brace for long-term use and that it should be classified in this benefit category. Discussions with the CMS staff got delayed due to COVID, and then we were invited to make our case at the CMS public hearing in June of 2022. At that presentation, we made that presentation and we had follow-up meetings with the CMS staff and with the medical directors of the DME MACs, the Medicare Administrative Contractors. The most recent to these meetings was this past April, where we presented compelling new research about the patient outcomes and the value of the MyoPro to individuals of Medicare age. We are encouraged to file claims for Part B patients. So we've now 6 patients and submitted 6 claims for payment. These claims are under review at this time, and it's unclear how the proposed rule has now come out with effective processing of these claims that were submitted to the DME MACs before the publication of that proposed rule. So what's next? CMS is accepting public comments on this proposed rule until the end of August, and then they'll hold a public hearing on this topic as well as propose the allowable fee for our devices. While there's no specific timeline for implementing the new rule or holding a public hearing, the next hearing is usually in the fall and then coverage and pricing go into effect sometime after that. Although I'd love to have a definite answer for you at this time, the process to the MyoPro covered as a powered arm brace is closer than ever to the goal line. In the meantime, we're not sitting still, since many Part B patients contact us each month about a MyoPro for the paralyzed arm, we're proceeding to screen these patients for medical eligibility and we're building a pipeline of Part B patients so that we can serve them after coverage and a fee are established. With that overview, I'll now turn the call over to Dave Henry, our CFO, for a more detailed discussion of our financial results and operational metrics. Dave?

Thank you, Paul, and good afternoon, everyone. To add to Paul's comments regarding coverage by CMS, if the proposed rule is adopted and the MyoPro is reimbursed by CMS on a lumpsum basis, the working capital required to grow our business to a level that supports cash flow breakeven is expected to be less than if the MyoPro are reimbursed as a rental. The reason for that is because under the proposed rule, we wouldn't have to wait 13 months to be fully paid for the manufacturing and patient provision costs that we would extend upfront. Turning now to our second quarter financial results. Total revenue for the second quarter of 2023 was $6 million. That includes revenue from the payment of the remaining initial license fee by our joint venture partner in China. As a result, total revenue was up 62% compared with the prior year quarter. Excluding that payment, product revenue of $4.2 million, increased 15% year-over-year. This growth was driven by a higher number of revenue units, offset by a lower average selling price or ASP. We recognized revenue on 97 units in the quarter, which was an increase of 21% over the prior year. ASP was approximately $43,700, down 5% from the prior year due to payer and channel mix. The direct billing channel represented 79% of revenue in the second quarter compared with 83% in the prior year quarter. International revenue represented 12% of product revenue in the second quarter. The remaining 9% of revenue was from the VA and domestic O&P channels. Backlog represents insurance authorizations and orders received, but not yet converted to revenue. Our backlog at the end of second quarter 2023 was 179 units, up 10% compared with the end of the second quarter of 2022. We received 125 authorizations and orders for MyoPro during the second quarter, an increase of 23% compared with the prior year quarter. Our patient pipeline increased to 969 candidates at the close of the second quarter, up 27% from the year ago quarter. [indiscernible] has been revised to reflect only known payers. 408 patients were added to our pipeline during the second quarter, an increase of 28% over the prior year. The year ago pipeline additions have also been revised to reflect only known payers. Gross margin for the second quarter of 2023 was 71.8% compared with 65.3% for the prior year quarter. Excluding the impact of the license revenue, gross margin on product revenue was 60.5%, a decrease of nearly 500 basis points compared with the prior year quarter. The decrease was due to a lower ASP and higher inventory and warranty reserves. Operating expenses for the second quarter of 2023 were $5.4 million, an increase of 2% compared with the second quarter of 2022. The modest increase was driven primarily by a higher incentive compensation accrual, offset by lower advertising expenses, which decreased 18% compared with the prior year quarter. We're on pace to spend roughly $1 million less on advertising in 2023 versus 2022, which is part of the $2 million in annual OpEx savings we're expecting for the year. Our cost per pipeline add decreased to $2,074 which is down 57% compared with the prior year quarter. As a result of the license revenue, operating loss for the second quarter of 2023 was $1.1 million compared with an operating loss of $2.9 million for the second quarter of 2022. Net loss for the second quarter of 2023 was $1 million or $0.04 per share. This compares to the net loss of $2.9 million or $0.42 per share for the second quarter of 2022. Note that the $6.8 million prefunded warrants issued in our January 2023 offering are considered common stock equivalents under GAAP and are included in our weighted average shares outstanding. None of the prefunded warrants have been exercised as of today. Adjusted EBITDA for the second quarter of 2023 was a negative $0.8 million compared with a negative $2.5 million for the second quarter of 2022. To summarize our year-to-date results, revenue for the first 6 months ended June 30, 2023, was $9.4 million, up 25% compared with the same period a year ago, while year-to-date product revenue of $7.7 million was up 17%. Year-to-date gross margin was 70.1% compared with 66.0% in the year-ago period. Year-to-date gross margin on product sales for Q2 of second 2023 was 63.4%. Operating expenses for the first half of 2023 were $10.4 million, a decrease of 2% compared with the same period a year ago. Operating loss for the first 6 months of 2023 was $3.8 million compared with an operating loss of $5.6 million for the same period a year ago. Net loss for the first 6 months of 2023 was $3.7 million or $0.14 per share compared with the net loss of $5.7 million or $0.83 per share for the same period a year ago. Adjusted EBITDA was a negative $3.2 million for the 6 months -- first 6 months of 2023 compared to a negative $4.9 million in the year ago period. Turning to our cash position. Cash and cash equivalents and short-term investments as of June 30, 2023, were $9 million. Cash used in operating activities was $300,000 for the second quarter of 2023 compared with $2.6 million for the prior year quarter. The reduction was driven by the license payment and cash generated by changes in working capital, primarily due to an increase in incentive compensation liabilities. Looking ahead, while our backlog entering the third quarter is higher compared with the prior year quarter and is slightly higher sequentially, the potential ASP in the backlog is lower due to payer mix. As a result, we believe that slight year-over-year revenue growth is attainable while sequential revenue growth will be challenging. Our ability to deliver product revenue in 2023 that meets our target of 20% to 30% year-over-year growth will depend on the number of insurance authorizations and orders we received over the next few months. With that financial overview, I'll turn the call back to Paul.

Thanks, Dave. Well, I hope we've conveyed our readiness to spring into action once Medicare Part B becomes a reality for us, while continuing to demonstrate excellent progress with the business in the meantime. So with that overview, we're now ready to take your questions. Operator?

[Operator Instructions] The first question comes from Ben Haynor of Alliance Global Partners.

Congrats on the development over at CMS. First off for me, if I do the math correctly, it looks like the pipeline drops improved pretty impressively from the prior quarter. Is there anything that you attribute that to? Is it just noise? Is it an improvement in the metrics from the virtual waiting room that you implemented? Or what would you ascribe that to?

Well, Ben, thanks for your comments. Within our department of patient advocacy, we've now a role called patient navigator. And these individuals are working with these patients following up with their physicians, therapists, acquiring the necessary medical documentation. I think that increased engagement with these patients is paying off by having more patients continue to go through the process to obtain the MyoPro.

And then on the 30 Medicare Part B patients you've added to the pipeline, are those kind of like newly acquired patients? Or are you kind of reactivating some folks that may have contacted you in previous periods and expressed interest in the MyoPro.

Yes. Most of these are new prospects that contact us because with our advertising, we got a lot of calls or new forms get filled out on our website and we typically have hundreds of Medicare Part B patients. The tactics that in the past, we've had to put them on hold, saying we'll give you an update when we have more information from CMS for covered ship. But now we can tell these patients if you're interested, let's do a telehealth screening, go to your physician, get a written order so that when we do get coverage by Medicare we could start to serve them. So these patients are contacting us every month and now we can start to build this pipeline in anticipation of being put into the -- that correct benefit category.

And to be clearer, the patients that are in the Medicare pipeline. That's separate from the 969 patient pipeline where we're keeping track of that settle it for now, and we're looking to grow -- obviously, grow the size of that pipeline in the third quarter.

Is that something you intend to break out in the future? Or will that kind of come together as hopefully the benefit category change occurs?

Yes. Well, that's actually because…

Yes. It will come together potentially but for now -- yes. Sorry. It will come together potentially. But for now, we'll keep it separate.

Yes. That's actually Medicare Part B becomes another good payer like the other plans that we're working with.

And then lastly for me, kind of a clarification. You mentioned the $300,000 in orders for the MARK clinical units and maybe I missed this. Did those shift in Q2? Or is that something that's going to occur later this year or has occurred in Q3?

That will occur during the second half of this year.

The next question comes from Scott Henry of ROTH Capital.

I think I'm just going to dig in a little deeper on the CMS situation to get a better understanding of exactly what it means and how it could impact the model. I guess for starters, when -- if you convert CMS to being a lumpsum payment versus rental over a period of time, do you expect the total amount to be significantly higher, the same? I wouldn't expect it to be less, but how should we think about that amount? And when will we know? And do you have a sense of what direction that amount if will be?

I wouldn't say -- I mean, it all depends on the fee that they charge. But just speaking in general terms, there is a roughly 5% adder that the DME MAC's will apply to cap rental payments to account for that time value of money as compared to paying on a lump-sum basis. But however, under Medicare rules, you're not allowed to bill the patient for a rental if the patient is for whatever reason isn't using it. And so there could be situations if they were a rental where a patient could have a health event or something like that. And then they wouldn't use -- they could stop using the MyoPro and we couldn't bill for it. And in that particular case you could be in a situation where you couldn't get your entire 13 months of rental payments. So I think overall, if you look at it qualitatively, I think lumpsum is better financially, obviously, for us than then be reimbursed on a cap rental basis.

Okay. So it sounds like conceptually, it's the same but significantly better terms. Is there a way to get higher payments from this process? Or is that something over time or sometimes they go lower over time? Just trying to get a sense of that.

Yes. The extent -- our expectation would be that the fee that Medicare ultimately says is going to be lower than our ASP now, how much lower we have no idea. That's -- other than that, anything else that would be just pure speculation on that part.

Now what is the difference between L8701 and L8702.

You refer on 2 different models. L8701 is the MyoPro W, which is just the elbow and the wrist, L8702 is the elbow wrist and the hand, the grasp unit. So that is reimbursed at a higher rate.

Now the other question I had is, obviously, you're going through the CMS path in one avenue. But you're also talking to the DME MAC's. Are those separate processes? Or how do those 2 events tied together?

Yes. Well, the link in that the DME MAC's contractors, these medical directors basically work for CMS. CMS staff directed us to go meet with the medical directors, which we did in April, presenting new research that is in the process of being published from our patient registry, we got several clinical studies showing the value of the device for Medicare age population. And the CMS takes those recommendations from the DME MAC's medical directors in making their assessment of whether to cover the device or not. So it's an integral part of the process, and we have a good meeting in April. And then in June, CMS came out with this rule that says there's value in powered devices, and these should be included in the brace category, which is a covered benefit category.

So those 6 specific filed claims, can they get paid out before as rental? Or do they wait in the queue until all of this plays out at the end of the year?

Yes. We're not sure. We have filed those claims with the medical documentation. They might start getting paid now perhaps as a rental. And then when CMS puts out the rule in flat and pricing as a lumpsum, they may shift at that point. I don't know and that's all we see what happens on those, Scott.

Yes, there's a lot of moving parts, as I'm just trying to understand it all. And then as far as timeline, I mean, it sounds like, let's say, they published this at the end of 2023. When does this picket get opened up? When can you start getting patients in this category?

Yes. So they have no specific time line, but if they do publish the rule by the end of the year, it's combined with the home health rule, which usually is, it could go effective by January 1, it's probably at the earliest. And then the question is, when do they publish an allowable fee. Now typically, what CMS does is they have these meetings twice a year, it picks coding meetings. And they will -- if they're going to publish a price, they usually publish a price in the meeting agenda, a couple of weeks ahead of the meeting. The meeting will probably take place at the end of November, early December. Should they publish a price, we'll be able to comment on it as well as others can. And then they can make their decision to publish it in the alphanumeric code set, and it could go effective January 1 or could be effective 90 days later to next quarterly update.

So -- and this is something we'll continue to track. And I guess my understanding is the benefit is among seniors, it potentially doubles the market without any additional effort from you from a selling perspective. So it brings some economies to the business model. Is that a fair way to think about it?

Yes. That's a good way to look at it because, again, the advertising, the other regeneration activities we're doing is already encouraging those Part B patients to contact us. So there's no additional advertising costs. There is other costs, though to follow up with these patients, talk to their physicians, gather their medical documentation because you have to have that in place to be able to fit these patients. The other side benefit to this is many other commercial plans will often follow what Medicare does. And also Medicare Advantage plans, some plans pay for the MyoPro today. Others don't require us to go through an appeals process. If it's covered by Part B, they will be required by law to also cover the MyoPro. So other Medicare Advantage seniors will have access to the MyoPro for the first time. So it's a significant increase in our addressable market.

Okay. Great. Congratulations on that progress.

The next question comes from Anthony Vendetti from Maxim Group.

So at the end of the second quarter or right at this point in time, how many sales reps do you have right now?

Well, we don't have sales reps, as you might think us, Anthony, for like, I guess, implantable medical device. So we have a call center, we have got 10 people based in Texas following up with prospects or family members that contact us. And then we have another 10 to certify process orthotists, be the clinical professionals, licensed professionals around the country. We then follow up with the patients to conduct evaluations, to measure them, fit them when we get an authorization. So we don't have a typical sales force that you might think of like a Boston Scientific device type company.

So these 10 people that are at the call centers and the 10 orthotists. Are they full-time employees, or how does that work?

They're full-time employees.

Okay. Were any of them added during the second quarter? Or this is -- you're already staffed for the anticipated ramp this year?

We added one new certified product store which is in the Midwest in the second quarter. And so we're staffed for right now. And also, we believe we can handle with this team and incremental volume increase for the Part B patients, but eventually as the Part B volume ramps up, we'll have to add more clinicians in the field as well as more people in our customer experience department.

Okay. So what -- maybe you sort of answered this, but maybe give -- what's your anticipated timeline in terms of hearing back from the MAC's on the timeline for in terms of when the race will be sort of approved reimbursement has a brace.

Yes, it's a good question. So right now, that proposed rule was published at the end of June, there's a 60-day comment period. So we're going to file comments as well as others in the industry, physicians, patient groups and so on. That closes August 29, then our CMS staff, Medicare staff will review those comments, and then they could issue a final rule making any time after that. So it could happen this fall, although they may push that out, but we are hoping that they will do it this fall. And then as far as publishing the fee, as I mentioned that, to the earlier question, they will usually publish a proposed fee in the [ big pick ] semiannual agenda. And then after comments on that, that feeds go live as early as January 1 or it could be sometime in 2024.

Okay. So if things go well, they'll review it after the comment period on August 29. They'll come up with a proposed fee in the fall, which could go live 1/1/24, but if not, 1/1/24, then hopefully sometime in '24.

Yes, that's correct.

[Operator Instructions] The next question comes from Edward Woo.

Congratulations on the quarter. Can you provide some comments on how your European business is doing? Is it doing as well as the U.S. business? And have you guys thought about expanding outside of Germany?

The international business is growing as Dave reported, it's 12% of our revenues. Now we've been adding business development managers and a few critical trainers in Germany. We have about a 100 orthotics and prosthetic clinics that have signed on to distribute the MyoPro in Germany. We focus on Germany because we're making good progress on reimbursement with the payers, statutory health insurance coverage there. If we have to appeal a denial with getting good responses from the social courts in Germany that are directing the payers to pay for the MyoPro. Our advertising approach there with the social media, there's been gaining traction as well. And we've decided to focus in Germany because, again, it's a large market, over 80 million population, good reimbursement, a lot of need there as well. So rather than make investments in opening up other markets, we should take 2 to 3 years to get reimbursement, get distribution channel going. We said let's double down and bring the MyoPro to more patients in Germany.

Yes. The other geography we're seeing benefit to is Australia. It's certainly not as large as Germany that we're having -- we're starting to have patients approved through the National Disability Insurance Scheme in Australia now for the first time. So I think that has an opportunity. We have a channel partner in Australia that we work with. And so there's the opportunity there to see more revenue out of that geography as well.

Are you guys in Canada at all?

We have a medical device license to distribute in Canada. We've signed up a couple of O&P clinics there. I know they are evaluating some patients and working through the Canadian social insurance system to get their initial reimbursement. So no orders in there yet, but I know we have a couple of patients in the O&P pipeline there.

I'll say, Dave doesn't live too far from the border or you should send them over one of these days.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Gudonis for closing remarks.

Well, thanks, operator. I just want to mention everyone, we're available for virtual and in-person investor meetings. So please contact LHA Investor Relations to set up the time. And of course, we'll keep you informed of developments at CMS and our status for the Medicare Part B patients. And just before we sign off, I want to remind you that we're very excited about Myomo's future beyond the Medicare opportunity we discussed today. We've got a compelling proven advanced technology product that addresses a large market opportunities. As you see, we really are improving our operational efficiencies across the board with the pipeline revenue growth and managing our operating expenses. Our international sales are growing as we discussed. We expect ongoing contribution from our joint venture in China, and we continue to innovate in product design and business processes, so we operate more efficiently as we scale the business. Well, thank you for your continued interest in Myomo and have a good day, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.