Tactile Systems Technology, Inc. (TCMD) Earnings Call Transcript & Summary

Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone. My name is Jonathan Guskind, Executive Director in Morgan Stanley's Investment Banking group. I would like to thank you all for joining us here for the continuing coverage of day 4 of the Morgan Stanley Healthcare conference 2020. It's my pleasure to have us here Tactile Medical and the company's Chief Executive Officer, Dan Reuvers; and Chief Financial Officer, Brent Moen. To start things off this afternoon, Dan is going to give us a bit of a preamble and provide a high-level overview on the platform, and then we are going to jump into Q&A. With that, the floor is yours, Dan.

Thanks a lot, Jonathan. And we appreciate the opportunity to share some information about Tactile Medical with the audience. Just a quick profile on Tactile, very focused company. We're serving as a market developer in the space of lymphedema. Lymphedema is a circulatory component that interacts closely with the venous system. And when impaired, can lead to a long-term, ultimately, chronic condition that results both in chronic swelling, along with other indications. It's a unique model that Tactile's undertaken. We're sort of the sole player that fulfills the entire ecosystem. We start with design and manufacturing of our device, and we carry that responsibility all the way through market development, introduction to prescribers, shaping a payer policy all the way to introducing it to the patient, training, making sure they have a positive outcome. So we're different than those that either manufacture a pump and turn those commercial responsibilities over to a regional or local DME player and conversely from the typical DME player, we also control the patient experience from beginning to end as well as the design of the device. The company has just finished up 2019 just under $200 million at about $190 million. We enjoyed gross margins over 70%, and I think perhaps the trifecta is that we've had 30% organic top line CAGR growth for the last 3 years, while at the same time being profitable and maintaining a really solid balance sheet. And I think that those components make us a bit of a unique beast.

Thank Dan. I know you just joined Tactile somewhat recently over the summer. I think it would be great for you to share a bit more why you joined the company and how your background will help lead to success in the long term?

Yes. So for those that unfamiliar with me, I had served as President most recently of Integra LifeSciences Global Neurosurgery Business, the Codman Specialty Surgical segment. It was about $1 billion global business. And I spent, in total, almost 12 years with Integra. I arrived as a result of an acquisition, a small business I sold to Integra and navigated a series of different roles, including leading the surgical instrument business, serving as President of the International Commercial Business for the broader organization. And then finally, the last 4 years, leading the neurosurgery business. One of the reasons that I opted to join Tactile had a lot to do with the profile I just shared. I think it's pretty rare air to find a company with the growth history that Tactile has been able to demonstrate, along with a really significant growth opportunity that still lies ahead. So I think our total available market suggests that this could look very much like the obstructive sleep apnea space once it matured. A big pool of patients that are under-recognized, still underserved, under-diagnosed and for sure, undertreated. The company, I believe, has the opportunity to mature on a very substantial and significant base that they've created for themselves and in the role that I played at Integra helping to navigate the business making sure that we had the infrastructure and the foundation to support a large organization that we eventually built, I think that's some of the same characteristics that I hope to help develop here at Tactile Medical. I'm also familiar with Tactile's business model. So coincidentally, my life's come a little bit full circle. Before Integra, I was President of a company called Advance Respiratory, which eventually sold to Hill-Rom. This was back in the early 2000s. Coincidentally, the business model was virtually the same. It happened to be in the respiratory space, but it included the full gamut of manufacturer all the way to payer policy, claims processing and serving the patient. So this is a space that I am also familiar with. And as I said, just really excited about the future that we can continue to create.

And as you've taken a deeper dive into the business over the last few months, what do you feel is the most misunderstood about the platform and something that you've tried to understand more as you've gotten up to speed?

Yes. I think from an external standpoint, I still believe the market size and the market opportunity is probably misunderstood. We acquired claims data, hard data from a source called LexisNexis. And the difference in the last 5 years has been quite stark. So in 2014, the claims data pointed to about 700,000 patients that were treated and had a claim paid associated with a lymphedema diagnosis. Fast forward 5 years, the same source of claims data pointed to over 1.3 million. So it doubled in 5 years. And I'm not of the belief that the market necessarily doubled, but the market awareness certainly has, through education efforts, in large part, by our team. So I think the misunderstood piece is perhaps the millions of additional patients that still lie beneath the surface. And I think our investment as the lead source of market development in evidence and education and awareness is all intended to help make sure that we realize that underserved population.

What would you characterize as the key differentiators for the platform? And what ultimately makes Tactile unique in the market?

I think the fact that we do play the full role. So as I said, we have competitors that happen to be in the space of making pneumatic compression devices, but then they turn the responsibility over to typically a regional or local DME company. We have a lot more control over the patient experience because of our national reach in the role that we play there. And I think the other one is the fact that we've got healthy gross margins as a result of sort of being the manufacturer all the way to the retailer allows us to reinvest into some of the market development initiatives that I think are going to be important to fully realize this opportunity.

Great. I want to change lanes a little bit here and spend some time around the pandemic with COVID-19 and understand how this has impacted Tactile, and what effects you ultimately see on the business that are transient versus sustaining over the longer term?

Yes. I guess it's hard to have any kind of a discussion without having a discussion about COVID impact these days. We tend to have conversations here even internally about pre- and post-COVID kind of framing those, but like us -- like everyone else, it certainly had an impact on our business. Some of the things that we've done to try and pivot quickly included the kind of work-from-home maneuvers that so many of our companies have done. I'm really proud the team assembled, the ability to do that so quickly as not to disrupt our business from an operational standpoint, including our ability to continue to manufacture products safely. I think one of the primary things on the COVID front that we've seen, some of which have come to pass. And I think some are still evolving. They come to pass is, we saw a lot of practices closed down and/or restrict access for representatives. So it certainly put a limit on our ability to continue to introduce information to new prescribers and engage with new patients. We continue to survey our customers every month, and what we've learned from the trended information is the good news is most of our customers have indicated that they are back open for business. So we've seen the reopening of all these practices that we depend on to triage and identify our patients. We've also seen a pretty welcome reception to get back in. So being able to access those clinicians and patients has also been largely restored. I think one of the challenges we continue to see is a little bit of a headwind is the amount of patients that some of these practices can effectively see in the same window of time. So in a given day, because they're needing to introduce some fresh protocols, including things like disinfecting the exam room thoroughly between each patient slows the throughput a little bit. So we're seeing progressive resourcefulness through extended office hours and clinic days, where some of our customers, I think, are starting to get closer to normal, but that was certainly one. I think there's -- it's also worth calling out. I think there's a couple of sustaining results that will endure post-COVID inspired by COVID that could be good guys for us and one of them is our patient training approach. We historically had done exclusively in-home training where we would send a clinical professional into the home to do a training whenever we would bring a new patient on board. As a result of COVID, our patients, our payers and our prescribers asked us to not go into the home. They were concerned about social distancing and unnecessary exposure, so we had to be resourceful about how we could train our patients while still respecting those boundaries. And as a result, our menu of training has evolved. And I think very much for the better and one that will probably endure post-COVID. And that is we've continued to invest more energy to have a better out-of-the-box experience. So some patients have been able to demonstrate that they can self-train with those tools and resources, including links to videos. They've expressed that they really appreciate not having to wait around at home or have to entertain someone coming into their home in this time. For those that aren't capable of that, we're doing virtual trainings, where we've got a group of clinical professionals that can do either Zoom type meetings with patients or support them by telephone. And then there's a smaller segment, I think, that will continue to require in-home training, but I think that, that shift will allow us to make sure that we have the best patient experience possible, and we can orient the right experience for each patient. And I think one other worth noting is professional education has been an important part of expanding the message and awareness and enlisting new prescribers. And the use of virtual education events has been proven to be really quite effective. What we're learning is very much probably like this conference, it's easier for folks to commit to participate when it's just a small segment of time, and they don't have the commute to an event or to another city for that matter. So we're seeing an increase in those that we're able to connect with through professional education via some really good events that we've hosted virtually.

Great. And maybe just teasing out that last part a little bit about the professional education events. I think you've mentioned on your last earnings call that 3,300 clinicians attended these events in Q2 versus 2,200 in all of 2019. How do you ultimately expect this to impact adoption going forward for your products?

Yes. I think it's a really good question. So professional education continues to be a really important piece, especially when we believe that one of the real keys to unlocking the lack of awareness is to make sure we connect with clinicians, help them understand how to identify and -- lymphedema and also what are the most suitable patients likely to respond to the right treatment. So we're going to -- we believe that, that's the source for new prescribers in addition to regular interaction with our salesforce in the field, but an important part is as we continue to put together what we think is a compelling curriculum, we're engaging with our salesforce, which is 250 heads strong in the United States, to identify the appropriate selected prescribers to attend those. So I'll give you a bit of an example. If we want to try and expand the primary care physician's ability to recognize lymphedema and either prescribe for it or refer more efficiently, one of those events that we recently hosted was designed to target PCPs. It was the basics lymphedema mechanics and the interaction between the circulatory system. We think that's the right message and education for that group. When we start to look at Head and Neck, which is a device that a version of our product that serves those patients that are cancer survivors that may have had a thyroid removed or something that may have disrupted their lymphatic system and resulted in lymphedema and some of the chronic swelling, it's a more targeted audience. So it might be ENT specialists or radiation oncologists that focus on that segment of patients. We have one coming up that's titled Radiation Fibrosis Syndrome, functional impairment on Head and Neck cancer survivors. So these are very targeted, not infomercials, but more about truly professional education. This one I just mentioned, is going to be hosted by a doctor from Sloan Kettering. And then we follow-up with those prescribers after they've participated, engage in a discussion and hopefully, work with them to identify the right candidates to be selected for our therapy.

Great, thank you. Let's spend a little bit of time around your view of the addressable market, and how the company plans to develop it going forward?

Yes. So I mentioned, while the LexisNexis data points to the fact that patients that have been recognized in the system with a claim associated with lymphedema doubled in the last 5 years, that gets you to a little over 1.3 million patients. We basically extrapolate that out based on our average sell price, and that would point to a market that would be north of $5 billion. Now what's important is, it doesn't account for any of the patients that have not yet been had a diagnosis with a claim associated with lymphedema and the body of evidence, the research points to somewhere in the neighborhood of 4 million patients that are likely cancer survivors that have or will develop lymphedema. There's another factor of phlebolymphedema, which the evidence suggests is perhaps 4x bigger than that. phlebolymphedema is basically the convergence of lymphedema and chronic venous insufficiency, and the two of those together would be referred to as phlebolymphedema, and there's an interaction that exists between the circulatory and the lymphatic system that results in chronic swelling, and sometimes things as significant as cellulitis. We've got a great body of evidence that points to reductions in cost by treating these patients effectively, including reductions in infections, and overall healthcare reductions, but it's the addressable market that we really believe is below the surface that's such an opportunity. Now we've got 270 million covered lives right now that are within -- that have some sort of a reimbursement payer policy, but continuing to build this body of evidence to expand the prescriber base and also to continue to improve payer policy such that they're all adopting a stance, I think, with a protocol that helps us make sure that the right patients get treatment. That's all part of the whole expansion of that addressable market. So we believe that, as I said, there's an awful lot of patients that need attention behind the curtain and our attempts to build evidence that drives awareness is, I think, paramount to the success of the story.

You made the decision recently to exit Airwear. Could you walk through the rationale behind that and how you see the strategy playing out?