Nuwellis, Inc. (NASDAQ:NUWE) Q3 2023 Earnings Call Transcript

Nuwellis, Inc. (NASDAQ:NUWE) Q3 2023 Earnings Call Transcript November 7, 2023

Nuwellis, Inc. beats earnings expectations. Reported EPS is $-1.81, expectations were $-3.11.

Operator: Good day, and welcome to the Nuwellis third-quarter 2023 earnings conference call. [Operator Instructions]. I would now like to turn the conference over to Vivian Cervantes, Investor Relations with Gilmartin Group, please go ahead.

Vivian Cervantes: Thank you, Danielle, and thank you, everyone, for joining us in today’s conference call to discuss Nuwellis’s corporate developments and financial results for the third quarter ended September 30, 2023. In addition to myself, with us today are Nestor Jaramillo, Nuwellis’s President and CEO; and Rob Scott, CFO. We also have Dr. John Jefferies, Nuwellis’s Chief Medical Officer joining us today. At 8 AM, Eastern today, Nuwellis released financial results for the quarter ended September 30, 2023. If you have not received Nuwellis’s earnings release, please visit the Investors page of the company’s website. During this conference call, the company will be making forward-looking statements. All forward-looking statements made during today’s call will be protected under the Private Securities Litigation Reform Act of 1995.

Any statements that relate to expectations or predictions of future events and market trends as well as our estimated results or performance are forward-looking statements. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. All forward looking statements are based upon currently available information and the company assumes no obligation to update these statements. Accordingly, you should not place undue reliance on these statements. Please refer to the cautionary statements and discussion of risk in the company’s filings with the SEC, including the latest 10-K and subsequent reports.

With that, I would now like to turn the call over to Nestor.

Nestor Jaramillo: Thank you, Vivian, and good morning, everyone. Welcome to Nuwellis’s third-quarter 2023 earnings conference call. For our call today, I will provide an overview of our third quarter performance and give an update on our strategic initiatives, including our supply and collaboration agreement with DaVita. And our exclusive license and distribution agreement with SeaStar for its selective cytopheretic device or SCD, which recently received an FDA approvable letter for use in pediatric acute kidney injury under a proposed humanitarian device exemption. Dr. John Jefferies, our Chief Medical Officer, will also add additional color on our DaVita collaboration and our clinical programs, and will provide his perspective on recent news affecting the renal industry.

Our Chief Financial Officer, Rob Scott, will then provide detailed commentary on the financial results before opening the call up for questions followed by my closing remarks. Before I turn to third-quarter results, I would like to acknowledge concerns about the current market situation and its effect on companies like Nuwellis. The reason I feel confident in the future of Nuwellis is because we have three fundamentally sound short-term growth drivers. First, we have our organic business, which is growing, represented by five consecutive quarters of year-over-year growth in our core heart failure business. Second is the expected commercialization of three new products within the next two years. And third is our supply and collaboration agreement with DaVita.

Turning first to our organic growth and third quarter results. In the third quarter of 2023, Nuwellis generated $2.4 million in revenue, a 17% increase versus the third quarter of 2022 and a 16% increase over the prior quarter. What is most relevant in our view is therapy utilization or the number of circuits [Technical Difficulty] console, which increased 26% over same period last year, reflecting continued increase in the number of patients being treated with the Aquadex therapy. Last quarter in Q2, the utilization was 14%. By customer category, we are pleased to see firm growth across each of the three category targets. With third quarter 2023 revenue in heart failure posting a 27% increase over the same period last year. Critical Care, a 16% increase and pediatrics, a 9% increase.

Higher console sales led the heart failure growth, while utilization gains drove critical care and pediatric performance. We continue to attribute a strong organic growth, especially in heart failure, through the growing awareness of our clinical data and support from multiple peer-reviewed publications over the past 18 months, validating the clinical and economic benefits of the Aquadex therapy. We are focused on driving awareness among clinicians and providers to help them understand that ultrafiltration through the use of the Aquadex system is the logical step when diuretics are not working and should be implemented earlier in the care pathway. Patients for whom oral or intravenous diuretics are not effective, should immediately move to the mechanical fluid ultrafiltration therapy, which is more controllable, precise, and predictable.

This is the message that our field organization is consistently delivering and is having positive results. I would like to point out that our installed base measured by placed Aquadex consoles is key for Nuwellis because it generates revenue quickly and is a leading indicator for growth in utilization of the therapy. The more consoles we place, the more patients are treated. With that, although our installed base in Q3 grew, we also continue to see lumpiness in hospital capital spending trends. Hospitals across multiple geographies are still facing capital budget constraints. As we navigate this environment, we are pleased to offer both rental programs and console sales, all while driving increased utilization in our systems. For example, in the first half of this year, our sales of consoles were soft, but our revenue rent — our rental revenue increased by 36%.

However, in Q3, our sales of consoles grew sequentially, but our rental revenue was soft. The good news is that hospitals are getting around the capital budget constraints by renting consoles while still growing the number of patients treated with the Aquadex therapy. We will continue to monitor hospital capital spending, especially in light of an elevated interest rate environment. Our second growth driver is our expected new product introductions within the next two years. We are excited that SeaStar medical recently received the FDA approvable letter for its selective cytopheretic device or SCD, where we are exclusive US distribution rights for the use in pediatric acute kidney injury patients. We are even more excited about the pooled analysis from two non-controlled clinical studies, showing that pediatric patients over 10 kilograms with acute kidney injury requiring continuous kidney replacement therapy treated with SeaStar’s SCD, had a 77% reduction in mortality and zero dialysis dependency at day 60 and zero device related serious adverse events or infections.

Turning to our internal product development program, also earmarked for our high growth pediatric patient category. We continue to advance development of our pediatric continuous kidney replacement therapy device, which is complementary to the SeaStar SCD therapy. We along with many pediatric nephrologists, believe this product will have a profoundly positive impact in survival and significantly improve the quality of life of neonates and small children with kidney malfunction, kidney issues or those born without kidneys. We are executing to plan, to continue, and continue to expect IDE approval in the first half of 2024, with full FDA clearance and commercial launch in the US early in 2025. Finally, we continue to move forward with our supply and collaboration agreement with DaVita to pilot Aquadex ultrafiltration to treat adult patients with congestive heart failure and related conditions in selected US markets.

In pairing the Aquadex system with DaVita’s care team, we aim to expand ultrafiltration therapy to many of the heart failure patients in the US suffering from fluid overload and unresponsive to diuretics. We are actively engaged in finalizing treatment pathways and pilot study sites. At the conclusion of the pilot, DaVita has the option to deliver its ultrafiltration service approval and expand ultrafiltration services to inpatient emergency room, observation units, and outpatient facilities in their contracted hospital accounts. Once that approval is deliver, our supply and collaboration agreement would be effective for up to two 5-year terms. We believe the future success of our pilot program with DaVita could potentially accelerate the clinical adoption of ultrafiltration when first line medical treatments are ineffective, changing the revenue growth trajectory for Nuwellis with an accelerated path to profitability.

I would like now to turn the call over to our Chief Medical Officer, Dr. John Jefferies, who would provide additional color on our DaVita collaboration and our clinical programs, in addition to his perspective on recent news affecting the renal industry. Dr. Jefferies?

John Jefferies: Thank you, Nestor, and good morning, everyone. I’d like to cover three topics with you today. First, our collaboration with DaVita, as you heard alluded to. Second, the progress we are making with our reverse clinical trial. And then third, our thoughts on ongoing announcements regarding the impact of a certain class of weight loss drugs or the so called GLP-1 agonists in renal care and our business. So for us it’s encouraging to note that our collaboration with DaVita continues to leverage expertise from cardiovascular medicine and nephrology, which provides a powerful vehicle to enhance our understanding of the cardio-renal syndrome. As such, we continue to look forward to increased awareness of the growing number of heart failure patients in United States and improve recognition of ultrafiltration as a safe and effective therapeutic option.

Whereas treatment of fluid overload continues to center on the use of oral and intravenous diuretics therapies, Aquadex offers a more predictable and precise approach to treatment of this very difficult clinical condition. Building on our body of clinical evidence, we continue to make progress on our Reverse-HF trial, evaluating mortality and heart failure events within 30 and 90 days of hospital discharge. To date, we now have 15 sites activated and a sevenfold increase in the number of enrolled patients since Q4 2022. As it relates to weight loss drugs, GLP-1 receptor agonists are increasingly prescribed in the US and internationally. These drugs are known to help regulate blood sugar levels. There are reports that GLP-1 receptor agonists may also reduce the risk of heart failure and other cardiovascular events in patients with type two diabetes.

There’s also evidence that these drugs may improve symptoms of heart failure. However, these reports are relatively small and long-term benefits in these areas are yet to be determined. And therefore, it is currently unclear how the GLP-1 receptor agonists will impact the use of ultrafiltration. Given the increasing number of heart failure patients around the globe, there will likely still be a strong need for fluid removal in these patients, some of which will benefit from mechanical diuresis as opposed to drug based interventions. In addition, this class of drugs may have the potential to bend the curve across multiple phenotypes. Which means that there may be different rates of progression to advanced heart failure and other diseases such as end-stage renal disease.

It may mean that more people will ultimately benefit from additional therapeutic options, such as Aquadex. For example, instead of going to a mechanical device, such as a left ventricular assist device or a heart transplant, patients may continue to be treated with guideline directed medical therapy and experience heart failure exacerbations. Which presents an opportunity for us to deliver ultrafiltration therapy to improve volume status in these acute and chronic settings. Thank you, and I’ll turn it back over to Nestor.

Nestor Jaramillo: Thank you, Dr. Jefferies. With that, let me now turn the call over to Rob to discuss our Q3 financial results. Rob?

Rob Scott: Thank you, Nestor, and good morning, everyone. Revenue for the third quarter of 2023 was $2.4 million, representing a 16% increase for the second quarter of this year and a 17% increase versus the third quarter of 2022. By customer category, third quarter 2023 revenue in heart failure increased approximately 27% over the same period last year, in critical care and pediatrics increased 16% and 9%, respectively. We are pleased to highlight that despite hospital capital budget constraints, console sales increases led heart failure category growth by increases in utilization of the Aquadex systems for critical care and pediatric performance. Gross margin was 57.3% for the third quarter of 2023, compared to 61% in the prior year period.

The decline in gross margin was primarily driven by lower console manufacturing volumes. However, our US disposable product margins are 74%, which are in-line with medical technology industry standards. Selling, general and administrative expenses in the third quarter were $3.4 million, a decrease of approximately $800,000, compared to the prior year quarter, driven by reduced headcount and related compensation expense. Third quarter research and development expense was $1.1 million, an increase of approximately $200,000, compared to third quarter of 2022, reflecting a modest increase in spend related to the final phases of development of our new pediatric CRRT device as we approach IDE submission. Total operating expenses were $4.5 million in the quarter, a decrease of approximately 12% compared to the third quarter of 2022 and a decrease of 26% sequentially.

Both the year-over-year and sequential decreases were due to cost saving measures implemented early in Q3. Net loss in the third quarter was $3.4 million, or a loss of $1.81 per common share, compared to a net loss of $3.9 million, or $36.72 per common share in the prior year period. The year-over-year decrease in the net loss per share is driven by an increase in sales, lower spend, and an increase in weighted average share count. We ended the third quarter with no debt and $4.9 million in cash and cash equivalents on the balance sheet, and we had 1.9 million common shares outstanding at September 30. On October 17, we closed $2.25 million of gross proceeds before deducting underwriting discounts and commissions and a public offering of Series J Convertible Redeemable Preferred Stock and Warrants.

This concludes our prepared remarks. Operator, we would now like to open the call to questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Aaron Wukmir from Lake Street Capital.

Aaron Wukmir: Hey, good morning, guys, this is Aaron on the line for Brooks this morning. I guess I want to start with sort of your expectation regarding the partnership with DaVita as it sort of relates to what you see them contributing to their — your success and the financial arrangement you have with them. And I know you mentioned a little bit in the prepared remarks, but I’m just trying to get a bit more color on what we can sort of expect with that aspect going forward here.

Nestor Jaramillo: Yes, good morning, Aaron. Good question. As you know, DaVita provides both ambulatory dialysis service, as well as inpatient dialysis for patients that are hospitalized needing dialysis. And they have a team of nurses and medical staff to provide that dialysis in the inpatient, in their what they call the DaVita multi treatment rooms. So the idea is for patients needing ultrafiltration, they have contract with DaVita for the dialysis is to do their ultrafiltration in their rooms. Now when you look at their public documents that they have published, you see that they have a large number of contract hospitals doing the dialysis. So the idea with this collaboration and supply is for us to sell the product to DaVita and they will provide the services to the hospitals to do ultrafiltration in fluid overload patients. [Technical Difficulty] Did I answer your question, Aaron?

Aaron Wukmir: Yeah, yeah. And then I guess sort of the same question in reference with SeaStar. How that different — or how that differ materially, I guess?

Nestor Jaramillo: Well, their device for pediatric use, we have an exclusive license and distribution agreement with them. Patients — pediatric patients needing to come into the hospital with a [Technical Difficulty] inflammatory reaction can be treated with the SeaStar device and significantly improve their mortality, as well as their quality of life. So the idea is for us, for our organization — our field organization to distribute that product in the pediatric hospitals, especially the ones where we have also ultrafiltration business.

Aaron Wukmir: Got you. Okay, and then if I could ask just one quick follow-up. Obviously, there is a fairly significant reduction to operating expenses this quarter. You sort of mentioned that they were due to some cost-saving measures. Is this sort of the plan moving forward to continue to make these cuts to OpEx? Or do you sort of see a different path to sort of achieving your longer-term goals? Thanks for taking the questions.

Nestor Jaramillo: Yes. On the last question, we did some savings measures in Q3 because we needed to rightsize and also provide more runway to our cash. So we don’t expect to do anything more in the future — anything drastic in the future. But we will continue to find ways to be more effective and efficient both in the field as well as here in our headquarters with our product margins.

Aaron Wukmir: Got you. That’s very helpful. Thank you, guys.

Nestor Jaramillo: Thank you. Aaron

Operator: The next question comes from Anthony Vendetti from Maxim Group.

Anthony Vendetti: Thanks. Good morning, guys. I’m just a little bit more of a follow-up on DaVita. So, I know it’s a pilot phase, but can you talk a little bit about what the plan is for the rollout, how many centers. And during this pilot phase, do you expect there to be a contribution to sales either in this quarter at all? Or is it more of a 2024 situation?

Nestor Jaramillo: Yes. yeah, good question, Anthony. Just to be clear, this collaboration that we were doing with DaVita is new to every stakeholder in this treatment. I mean, is new to DaVita, is new to us, and is new to the hospitals. So we decided to do a pilot just to learn everything that we need to learn about this collaboration, which includes treatment pathways for patients, billing, a contract amendment that DaVita would have to do with their hospital customers. So we wanted to take the time to make sure that everything goes well, both for the hospitals as well as for DaVita and for us. So that’s why we’re initiating this pilot. And we are in the process of defining the care pathway, what are the sites that are more fitted to do this collaboration?