Edited Transcript of SSH earnings conference call or presentation 5-Nov-19 2:00pm GMT – Yahoo Finance

EDEN PRAIRIE Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of CHF Solutions Inc earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

CHF Solutions, Inc. - CFO

* John L. Erb

CHF Solutions, Inc. - Chairman, CEO & President

CHF Solutions, Inc. - Chief Commercial Officer

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

Good morning and welcome to the CHF Solutions Earnings Conference Call for the Third Quarter Ending September 30, 2019. (Operator Instructions) Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the call ends.

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

Thank you, operator, and thank you all for joining today's conference call to discuss CHF Solutions corporate developments and financial results for the third quarter ended September 30, 2019.

With us today are John Erb, the company's CEO and Chairman of the Board; Claudia Drayton, the company's CFO; and Nestor Jaramillo, the company's Chief Commercial Officer. At 8:00 a.m. Eastern Time today, CHF Solutions released financial results for the quarter ended September 30, 2019. If you have not received CHF Solutions' earnings release, please visit the investors page at http://www.chf-solutions.com.

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

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

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

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

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Thank you, Scott, and good morning, everyone. Welcome to the Third Quarter 2019 Earnings Call and Corporate Update. Our vision is to become the global market leader in fluid management with solutions that change the lives of patients suffering from fluid overload. CHF Solutions is now expanding its therapy into critical care therapies, including cardiovascular surgery and liver disease, continuing to be at the forefront of fluid management in heart failure and expects to soon be commercializing our products in pediatrics. Throughout this call, I will point out how we are transitioning from a primary focus on the chronic needs in heart failure to the acute needs in critical care and soon to the life-saving therapy in pediatric care.

During the call, I will highlight the progress we have made during Q3 in executing on our vision and provide an update on the following topics: number one, our pediatric strategy; number two, our critical care strategy; number three, clinical studies update; and four, our revenue.

Regarding our pediatric strategy, as I previously reported, we had a very successful pre-submission meeting with the FDA in mid-May to discuss modifications of our label to specifically include pediatric patients. The FDA was very supportive, collaborative and agreed with the 510(k) application strategy we presented. During the pre-submission meeting, the FDA recommended we complete several additional bench tests to confirm safety for the pediatric population, which delayed our anticipated submission by a few months. The FDA did not require any clinical evaluations before submission of the 510(k). We completed the 510(k) application during Q3 and submitted it to the FDA at the end of September 2019. We anticipate a 90-day review by the FDA and look forward to receiving market clearance for pediatrics in early Q1 2020.

The Aquadex FlexFlow system is not yet cleared by the FDA for use in pediatric patients. And although we are not currently marketing to physicians treating pediatric patients, we continue to receive unsolicited inquiries from pediatric hospitals. In fact, 6 of the country's leading children's hospitals use Aquadex to treat pediatric patients because of its capabilities for adjusting flow rates and the low volume of extracorporeal blood required by small-sized patients. The Aquadex system is the only available device with these capabilities in the United States.

These children's hospitals are treating pediatric patients for many conditions that can result with fluid overload, including acute kidney injury, renal support, cardiac diseases, electrolyte abnormalities and multiple organ failure or organ transplant.

During Q3, a very impactful multicenter, retrospective clinical study was published in the Clinical Journal of the American Society of Nephrology, citing very positive results for treating pediatric patients with the Aquadex FlexFlow system. This was an independent physician-initiated study intended to evaluate the use of hemofiltration and ultrafiltration therapy with the company's Aquadex FlexFlow system in pediatric patients. The study titled Kidney Support in Children Using an Ultrafiltration Device included 117 patients in 3 weight categories, less than 10 kilograms, 10 to 20 kilograms and above 20 kilograms, suffering from fluid overload, acute kidney injury or end-stage kidney disease. All patients across the 3 weight categories were treated with the Aquadex FlexFlow system.

The primary outcome was survival to the end of therapy. In patients weighing over 20 kilograms, a total of 32 patients, 97% survived to the end of therapy. In patients weighing between 10 and 20 kilograms, a total of 13 patients, 100% survived to the end of therapy. In patients weighing under 10 kilograms, a total of 72 patients, 60% survived to the end of therapy. There is a high mortality rate in all 3 of these patient segments, but according to one of the paper's authors, 97% of the children under 10 kilograms that do not receive the Aquadex therapy die because there is no other alternative treatment. This is the transition into life-saving therapy I mentioned earlier, which we offer with the Aquadex FlexFlow system, and we are the only company that can offer it.

On September 25, Stuart Goldstein, MD from Children's -- sorry, Cincinnati Children's Hospital Medical Center; Dr. David Askenazi from Children's of Alabama; and Dr. Shina Menon from Seattle Childrens Hospital participated in a conference call and webcast to provide an overview of the clinical uses and results of the multi-center, retrospective study. The study involved pediatric patients who need a kidney support and utilize the company's Aquadex FlexFlow system. Jeff Cohen, Managing Director, Equity Research, Healthcare and Medical technologies at Ladenburg Thalmann & Co. moderated the discussion. Dr. David Askenazi, Professor of Pediatrics at the University of Alabama, Birmingham, Children's of Alabama, reported that this is the first multi-center clinical study to report experience in pediatrics in which an ultrafiltration device was used to provide kidney support therapy in younger patients.

For many of the types of patients in this study, available therapies require very high relative extracorporeal blood volumes, which can be challenging. With the use of our aquapheresis device with a small blood volume and low flow rates, the investigators were able to initiate therapy with excellent hemodynamic stability.

On the critical care front, our cardiovascular surgery growth opportunity is significant because using the Aquadex FlexFlow system is a simple form of ultrafiltration that can be prescribed by any medical specialty for the treatment of volume overload in patients post surgery, including the cardiovascular surgeon, anesthesiologist, pulmonologist, intensivist, pediatrician and physician's assistant.

We are continuing our marketing and sales focus to the acute needs in cardiac surgery, where physicians need a simple and predictable method to rapidly remove the additional 4 to 6 liters of fluid put on the surgical patient to compensate for the blood flowing through the heart-lung machine. It is vital to remove this excess fluid immediately post surgery, before the patient can be excavated from the ventilator, taken out of the cardiac ICU and properly managed after leaving the hospital.

Fluid overload is the third-highest reason for a cardiac surgical patient to be readmitted to the hospital in the first 30 days post discharge and the #1 reason a cardiac surgical patient is readmitted to the hospital after 30 days from discharge. The use of our therapy can be prescribed by any of the physicians involved in the care of the patient without calling in the nephrologist, which may be categorized as an adverse event, and thus, avoiding a potential hit in surgery quality scores and potential costly penalties.

Among the key reasons cited for aquapheresis therapy were the ease of use for both doctors and other hospital staff, rapid patient removal from the ventilator, decreased need for blood transfusions, the efficient utilization of hospital resources and the ability to personalize treatment based on the individual patient's need. This is the transition to acute needs in critical care I mentioned earlier, where we offer the Aquadex FlexFlow system.

On the clinical studies front, there are several studies underway, and we expect results to be published in the next 3 to 12 months on the Aquadex FlexFlow System. First, we are working with Mount Sinai Hospital in New York City to support their retrospective study that will assess the use of Aquadex in patients who underwent cardiac surgery and the associated clinical outcomes. A total of 700 patients will be evaluated, 200 patients that received Aquadex therapy and 500 patients that did not in match control cases.

Second, our customers are beginning to evaluate the use of Aquadex in another area of critical care, liver. Mount Sinai is also conducting a physician-initiated clinical evaluation of using the Aquadex FlexFlow System in advanced liver disease, including liver transplant.

Third, we recently announced that Abington Hospital, which is part of the Jefferson Health System in Philadelphia, has received approval for a physician-initiated, retrospective study with 344 heart failure patients treated with Aquadex with the aim to define amounts of fluid removed, renal function outcomes and the impact on readmission rates post aquapheresis.

Finally, we remain focused on identifying and researching multiple diagnostic technologies that more clearly inform treatment providers on appropriate Aquadex patient selection, when to initiate therapy, how to manage throughout the therapy and when to discontinue ultrafiltration. A study cosponsored by CHF Solutions and Daxor Corporation received IRB approval and will be initiated this month to start enrolling patients. This study is aimed to characterize the synergies between the Aquadex FlexFlow (inaudible) feature in conjunction with Daxor's BVA-100 Blood Volume Analyzer to assist in informing clinicians on fluid volume status and how to manage therapy to achieve positive clinical results. We believe that this collaboration with Daxor is another important building block of our strategy to evaluate diagnostic tools, which may refine and maximize fluid management therapy.

Third quarter revenue was $1.3 million, an 8% decline in year-over revenue versus Q3 2018. We believe that our revenue decline is due to the short-term impact of the change in our account manager sales strategy we recently communicated. We are refocusing our sales team to address the faster-growing segment of our business in critical care and to prepare for our expected launch in pediatrics. This change in strategy has necessitated our changing the criteria and the experience required for account managers. We believe that the primary reason for the Q3 shortfall in revenue was due to open sales territories as we revamp the team. We have retained the services of a top executive search firm to help build out our sales organization and the sales competencies we need in executing our new strategies.

During the quarter, we opened several new hospital systems, including Memorial Hermann, which has 13 hospitals in the Houston, Texas area; Baylor Scott and White, which has 28 hospitals in the Dallas, Texas area; the Methodist Hospitals in Memphis, Tennessee; and Texas Health Resources Hospital system with 26 hospitals in Northern Texas. In addition, several new pediatric hospital accounts began use of the therapy, including children's hospital of Pennsylvania and duPont children's hospital in Wilmington, Delaware.

Looking forward to Q4, we have a robust pipeline of hospital systems initiating the Aquadex therapy, including university hospitals with 18 hospitals in Ohio, WellStar Health System with 11 hospitals in Georgia, Baptist Memorial Care Corporation with 14 hospitals in Tennessee and the NewYork-Presbyterian hospital system with 13 hospitals in New York, plus 5 new pediatric centers.

I will now turn the call over to Claudia, who can walk you through our Q3 2019 results and financial details. Following that, I will provide some closing comments, and we'll open the call to questions.

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

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Thank you, John. Good morning, everyone. Turning to the P&L. Revenue for the third quarter was $1.3 million as compared to $1.4 million for the third quarter of 2018, a decline of 8%, mainly the result of the sales realignment we announced earlier this quarter.

Regarding our operating cost and expenses, I will briefly comment about major drivers. First, regarding our cost of goods sold in the third quarter of 2019, we continue to see improvements in our gross margins, resulting from the transition to in-house manufactured inventory. Our margins were about 50% -- 57% for the quarter, 24 percentage points above last year's Q3 margins and 7 percentage points above Q2 2019 margins.

Second, regarding our selling and administrative expenses, current quarter expenses increased by 10.6% from last year. The increase results from additional clinical specialists we hired to assist in opening and training new accounts and to train new users in existing accounts.

Next, R&D expenses increased by 12.9% versus last year. The increase was driven by investments in product development to support our 510(k) submission for pediatric clearance, and for updates to our console and catheter to provide better customer experience and improve adoption.

The net loss for the quarter was $4.5 million or $1.70 per share compared to a net loss in the third quarter of 2018 of $4.2 million or $8.50 per share.

Regarding our liquidity position, we used $3.8 million of cash in the quarter to finance our operations, an increase of $0.5 million versus last year, mainly the result of the investments in our sales organization and in R&D, which I previously discussed.

We ended the quarter with approximately $3.6 million in cash and cash equivalents and no debt. Subsequent to quarter end, we announced 2 financing transactions for net proceeds of approximately $1.7 million.

Pro forma cash balances as of September 30, reflecting these transactions is about $5.3 million.

In terms of modeling the remainder of 2019, we expect that the impact of the sales reorganization will be largely behind us in Q4, and that we will resume double-digit growth versus prior quarter in the prior year. We expect that as we continue to operate and refocus our sales force and as we continue to introduce our therapy into new hospitals and hospital systems, we will continue to drive market acceptance and revenue growth.

Regarding our gross margins, we expect that they will continue to improve as our volumes and efficiencies increase. Regarding our operating expenses in Q4, we expect to see our investments in sales and marketing to remain consistent as we replace rather than add personnel and for R&D expenditures to decrease.

I will now turn the call back over to John.

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

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Thank you, Claudia. We are transitioning from a primary focus on the chronic needs in heart failure to the acute needs in cardiac surgery and soon to the life-saving therapy in pediatric care. We anticipate further accelerated sales growth by continuing to position ourselves in the market as the primary provider of ultrafiltration therapy for cardiologists, hospitalists, intensivists, cardiac surgeons and pediatricians. We are spearheading the growing awareness of the current challenges faced with using IV diuretic therapy only, and thereby introducing the clinical value of aquapheresis treatment as an opportunity to improve clinical outcomes, reduce rehospitalization days, reduce a major expense to the health care system and saving lives in pediatrics.

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

Operator, please open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

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

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So a few issues I wanted to dive into. So firstly, could you talk about this study amounts are in as far as therapy compared to non-therapy for 200 and 500 patients? Did they start that study? And can you tell me some of the parameters in that study? And could you also speculate, if you will, as far as types of surgeries? Were these valves, bypasses, et cetera? And are they going to be using Aquadex prior to surgery and measure that? Or post surgery or both?

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

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So Jeff, I can't give you a lot of details. This is a physician-initiated, retrospective study. So these are basically at -- in cardiac surgery. They are looking back 700 patients, 200 of which they've used Aquadex on. Because it's basically a Mount Sinai-owned study, I don't have a lot of those details. As it's pulled together as completed, we'll get details. Our Senior Director of Clinical Studies is working closely with Dr. Lowe at Mount Sinai to pull this information together, but it's a retrospective study.

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

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Got it. All retrospective. And will that be published or shown to the public at some point? Will we be able to see that presumably?

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

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Yes, yes. Again, it's under the control of Mount Sinai. And as they told us, that's the plan is to have it published. We're not sure when or where. It's when they get it completed.

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

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Got it. Okay. Secondly, can you talk a little more about the pediatric market? We've done some work on this and as far as what we think or the amount and size and patient population of the appropriate centers in the U.S., could you just expand upon that a little bit with us as far as the higher-level pediatric market in the U.S., do you think that's on the order of, call it, 45 to 60 centers? And how do you determine the scale of each center? How have you been thinking about it prior to the label expansion?

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John L. Erb, CHF Solutions, Inc. - Chairman, CEO & President [7]

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Yes. There, again, we've been very conservative at this point because we really have not been able to market to the children's hospitals. Once we get market clearance and we can go to the children's hospitals and talk about the therapy, talk about the opportunity, we'll have a much better handle on the market opportunity ourselves. We have been, I think, very conservative in looking at what is our addressable market. And we think that addressable market is a bit over $100 million potential revenue. So again, but that's, I think, conservative. It's early. And we really need to get the clearance before we can really dig in and have conversations with the pediatricians and the children's hospitals directly.

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

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Okay, got it. And then lastly from me, if you could talk about the change in sales strategies as far as where you're talking about revamping the team and how that may correlate toward the SG&A line for the near future? And as you transition, what does that mean as far as -- it's sounding like less for heart failure, more for cardiac, critical care and pediatrics. And how does that look as far as the silos and the spend? And how does it look as far as what percent of the sales focus is switching or has switched? Would you say that, that's half complete or 2/3 complete? And how that correlates to staff and spend going forward? That's it for me.

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Nestor Jaramillo, CHF Solutions, Inc. - Chief Commercial Officer [9]

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Yes, Jeff, good question. This is Nestor Jaramillo. We -- as we prepare for introducing the pediatric strategy and the pediatric therapies as well as the cardiac surgery, which is one of our fastest-growing therapies, we needed to transition the competencies of the sales reps from focusing on heart failure or having the experience in heart failure and cardiology, more towards cardiac surgery and critical care. So we are probably about half there. We have to transition some reps, all the ones left voluntarily, given their competencies were not in line with this strategy. So we are in the process of replacing those territories. We also, as John mentioned, we have retained the services of the high-end recruiter to help us with this task.

In terms of the finance impact, we believe that they are going to be neutral to what we projected early in the year. Most of the territories have already been budgeted for. So we don't think that, that's going to have a significant impact on our finance.

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Operator [10]

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The next question comes from the line of Kyle Bauser with Dougherty & Company.

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Edited Transcript of SSH earnings conference call or presentation 5-Nov-19 2:00pm GMT - Yahoo Finance