Tactile Systems Technology, Inc.

stand by. Welcome, ladies and gentlemen, to the third quarter 2024 earnings conference call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. I would now like to turn the call over to Sam Bensinger, Investor Relations at Gil Martin Group. for a few introductory comments. Please go ahead.

Good afternoon, and thank you for joining the call today. With me from Tactile's management team are Sherry Dodd, Chief Executive Officer, and Elaine Berkemeyer, Chief Financial Officer. Before we begin, I'd like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties, which could cause actual results to differ materially from those indicated, including those identified in the risk factor section of our annual report on Form 10-K, as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. With that, I'll now turn the call over to Sherry.

Thanks, Sam. Good afternoon, everyone, and welcome to our third quarter 2024 earnings call. Here with me is Elaine Berkemeyer, our Chief Financial Officer. Today, we will review our financial results for the third quarter, discuss evolving market dynamics across our business, and provide progress updates on each of our three key ongoing commercial initiatives. As a reminder, these initiatives cover technology and workflow-related investments in sales and order operations, the development and launch readiness of our next generation lymphedema platform, and a generation of clinical evidence to support further patient access to our platform. We will also provide an update on our full year 2024 revenue guidance and capital allocation strategy. Total revenue in the third quarter grew 5% year-over-year to $73.1 million. In our lymphedema business, revenue increased 4.4% year-over-year to $65.3 million. and airway clearance revenue increased 10.3% year-over-year to $7.8 million. Our growth margin increased 410 basis points year-over-year. Margin expansion was primarily a result of lower material costs and warranty expenses, resulting from improvements in the design of our products over the past several years. Adjusted EBITDA grew 39.3% year-over-year in Q3, representing the 10th consecutive quarter of year-over-year improvement and reflecting our commitment to delivering continued improvements in operating leverage. From a cash perspective, cash and cash equivalents increased sequentially by $8.5 million, increasing our cash balance to $82.1 million as of September 30, 2024. The sequential growth in both adjusted EBITDA and cash balance are indicative of our operational maturity and continued focus on balancing profitability and cash generation with investments in our business. While pleased with our third quarter performance across key multiple metrics, our revenue results were below our expectations due to a confluence of two main factors. On our Q2 call, I spoke to the impact of increased documentation requirements on our lymphedema sales rep productivity due to the Medicare administrator's approach to administering the pneumatic compression pump LCD. During the third quarter, we saw strong execution in our mitigation activities. However, growth in the lymphedema business was impacted to a slightly greater extent than originally expected. In our airway clearance business, we continued to see year-over-year growth, but DME buying patterns led to uneven results. From a business fundamentals perspective, we continued to see strong patient and clinician demand for our products. We are taking a concerted approach to fortifying our sales channels, simplifying our front and back office work through technology modernization, and amplifying the voice of our patients and providers through product and service innovation. Driving further revenue growth and shareholder value remain top priorities, and I'm confident in our ability to do so while sustaining our track record of strong bottom line performance. With that backdrop, let's review the respective business line performances, beginning with lymphedema. Today, I'll focus our lymphedema discussion on two main topics. First, a review of our Q3 performance, particularly relative to Medicare channel dynamics. And second, an encouraging update on the recent major policy announcement from CMS regarding changes to the coverage policy for pneumatic compression devices. As a reminder, on our Q2 earnings call, we discussed revised expectations for the full year 2024 to account for the unexpected change in the Medicare administrator's interpretation of the 2015 LCD for pneumatic compression devices, or PCDs, and the associated increase in documentation collection required for complete claims. For tactile, the sourcing responsibility for this added documentation falls on our sales reps, who work with the prescribing clinicians to collect the required details. As a reminder, our sales reps have call points across vascular practices, vein centers, oncology, and lymphatic therapists who treat patients across government and commercial payers. Because our sales reps support all patients, regardless of insurance type, the increased burden on this Medicare documentation gathering impacts our reps' productivity as a whole. While this disproportionately impacts claims for Medicare patients, it also impacts sales activities across all channels. To be clear, While the additional documentation collection tends to extend the timeline from order completion to product shipment and claim submission, it has not resulted in a higher rate of claims denials. We have also not seen an increased number of post-payment Medicare audits. Our collection across channels remains strong, as evidenced by our sequential cash generation. Despite this increased documentation requirement for Medicare patients, lymphedema sales grew 4.4% year-over-year in the quarter and were roughly flat on a sequential basis. With a full quarter of experience now dealing with the changes in LCD interpretation, we've gained much greater insight into how exactly these dynamics are playing out in our revenue cycle management results and have seen our strategies working to mitigate the full impact of this policy turbulence. Specifically, we've modernized and expanded customer facing and internal facing workflow related tools. For example, we have migrated to a more efficient electronic method of verifying patient insurance and launched our previously piloted e-prescribing tool nationally to help streamline the prescriber experience with required data collection. We've received positive feedback on the e-prescribing tool and we are seeing strong adoption through these early days of national launch. Importantly, we will continue to update this tool to remain current with coverage policies, further mitigating the administrative burden on providers and our sales reps. Further indicative of our strategy to leverage new technologies to drive efficiency, we also accelerated the implementation of select tools from our new CRM, which we plan to fully deploy in early 2025. These tools have better equipped our sales reps to best organize and prioritize their work so they can be as efficient as possible. From an internal people and process perspective, we've redesigned and streamlined various internal business processes to enhance speed and efficiency in order operations. With respect to our human capital, in Q3, we redeployed portions of our back office resources to work directly with the sales reps and patients to support timely documentation gathering and patient engagement. We also added incremental contractor resourcing to assist with documentation efforts. Finally, we continue to make progress with increasing the percentage of in-home patient demos that are performed by our patient education consultants, also known as PECs. This quarter, 48% of in-home demos were performed by our PECs versus 45% in Q2 and up from 30% at the end of 2023. We are pleased with this continued growth and continue to expect our PEC staff to complete at least 50% of in-home demos by the end of 2024. Regarding sales headcount, we ended the third quarter with 270 reps, up from 264 at the end of the second quarter and within our target range for the full year. Our lymphedema channel mix was also a positive story in the third quarter. Despite aforementioned impact on the overall sales rep productivity, our VA and commercial sales demonstrated strong growth in the quarter, reflecting solid underlying fundamentals in both channels. Both grew double digits year-over-year, with commercial up over 20%. Strength in the VA channel was particularly impressive with 16% year-over-year growth driven exclusively by FlexiTouch and aided by the recent publication of positive clinical trial results for veterans using FlexiTouch versus standard care. Collectively, these tools and process enhancements combined with human capital investments and strong underlying demand for our products leave us confident in our ability to build momentum through Q4 and into 2025. With that context on the third quarter performance, I want to pivot to an encouraging upcoming change in the Medicare coverage policy for PCDs. Last month, CMS announced that the current LCD policy will be retired as of November 14, 2024, and that the existing national coverage determination, or NCD, will instead be the sole coverage policy in effect. We view this as a win for lymphedema patients and a positive for our business. As brief context, the NCD policy for PCDs was established in 2002, and Tactile followed that policy until 2015 when Max established their own LCD and began adjudicating claims under a more stringent policy, which, for example, defines specific reimbursement eligibility requirements for basic versus advanced PCDs. Since the creation of the LCD, the NCD and the LCD policies have coexisted with some similar sets of requirements, but also some areas of conflict, particularly in terms of coverage eligibility for FlexiTouch. The LCD required the patient to try a basic pump before receiving an advanced pump, even if the basic pump did not meet the advanced clinical needs of the patient. Tactile adjusted are internal claims processes, and related documentation requirements to the LCD, and we've continued to refine and adapt our approach based on the MACs' evolving adjudication patterns. With the retirement of the LCD in mid-November, the MACs will adjudicate claims moving forward based only on the NCD. This provides for greater flexibility to consider case-by-case patient needs, including initiating PCD therapy for FlexiTouch, if clinically supported. In short, this is a positive for tactile and for patients. Coverage policy changes can create disruption, but in the case of this change, we are optimistic. We have over a decade of experience submitting claims under the NCD, including extensive adjudication history, audits, and knowledge of where there is ambiguity in the NCD policy language. As needed, we can quickly adapt the e-prescribing tool, mobilize training and education for our sales force and clinician partners, and implement claims processing adjustments while monitoring success rates. As stated earlier, the NCD policy does have some language ambiguity. If they choose, the MACs can continue to apply their own interpretation of the NCD policy, which may be similar to their current LCD position. Ultimately, we believe the change to the NCD will be good for patient therapy access, and we'll be monitoring adjudication behavior and advocating for patients as clinically appropriate. In summary, we expect the recent turbulence associated with the lymphedema LCD coverage policy interpretation to diminish in the near and medium terms. With the change to a sole NCD policy, we believe the dynamics that negatively impacted Medicare channel sales directly and commercial channel sales indirectly in Q2 and Q3 will improve moving forward. While total retirement of the LCD was unexpected, we are pleased with the MAX decision and believe the elimination of the conflicting policies represent a patient-friendly change that will make it easier for Medicare patients to gain access to life-changing treatment options for their lymphedema. As the market leader, we have worked closely with the MAX, CMS, and professional societies for years to lead societal advocacy initiatives and industry coalitions, which have pushed for policy changes. We feel this is our responsibility as the leader in this space, and I'm proud of the work our entire team has done every step of the way to help influence this policy change. Turning now to a review of airway clearance, sales of AfloVest were up on a year-over-year basis, but down sequentially, as expected, due to seasonal dynamics. While bronchiectasis itself is not strictly seasonal, it is influenced by seasonal changes, and the associated increase in respiratory illnesses like allergies, the cold, and flu, which are most prevalent in November through May. Beyond these seasonal dynamics, our performance was also affected by uneven buying patterns across a handful of our DME customers. We remain encouraged that there is a large number of bronchiectasis patients that are undiagnosed and undertreated. Our airway clearance sales organizations are the experts in educating and training our DME sales partners and providers in bronchiectasis and the role of AfloVest in their care. We continue to believe that AfloVest is a compelling, differentiated offering for these patients. As mentioned earlier, we had several bright spots in the quarter both operationally and financially that demonstrate continued momentum with respect to profitability, leverage, cash generation, and growth in our VA and commercial channels. That said, the cumulative effect of Q3's challenges within the Medicare channel and airway clearance business have led us to further revise our revenue guidance for 2024. We now expect total revenue in the range of $292 to $295 million. On the profitability side, as mentioned, we continue to deliver year-over-year increases in adjusted EBITDA and expect that strength to continue. And as a result, we are raising our guidance for adjusted EBITDA to a new range of 35 to 37 million. We have several reasons to be optimistic in our ability to close out the year strong from a revenue perspective. Q4 is typically the strongest quarter for our lymphedema business due to patient copays being at the lowest at any point during the year. As shared, we are still in strong execution mode of our current commercial initiatives. We are investing and deploying technology and workflow-related improvements, including the national rollout of e-prescribing and increasing PEC and back-office support to perform non-selling administrative activities. We publish strong clinical results which support the value of FlexiTouch versus standard of care, and our launch of Nimble is generating enthusiasm among clinicians and patients. As many of you are aware, Nimble is the next generation of our basic PCD and an important addition to our leading portfolio of patient-focused, clinically proven lymphedema therapy solutions. The first phase of Nimble's introduction to the market is targeted specifically for upper extremity treatment, a patient group dominated by breast cancer survivors. In fact, up to 40% of breast cancer survivors are affected by lymphedema, and they are often surprised and unprepared to learn that after going through the ordeal of breast cancer treatment, they now have been diagnosed with a new, lifelong, chronic progressive disease with no cure. For these patients, the constant swelling and discomfort of the breast, trunk, arms, and hands limits mobility, activity, and travel. It is difficult and time-consuming to treat, and patients seek a more convenient option that reduces the physical and physiological burden of treatment while still providing the best therapy possible. They now have that with Nimble. From a design and feature perspective, Nimble is 68% lighter, 40% smaller, and uses 33% less hosing than our previous generation device. Nimble's compact design is the smallest PCV of its kind, making it an ideal therapy for daily use at home or on the go. In addition to these patient-centric design features, Nimble also offers connectivity to our free Kiley digital application, providing patients a more simple way to track their usage and change in symptoms and to share results with their care team. Early feedback from patients and clinicians has been positive, as both groups appreciate this compelling treatment option designed to increase adherence and improve clinical outcomes. Patients specifically value the connectivity to Kiley and its role in aiding increased therapy engagement. We are excited about this new platform and we'll be expanding NIMBL to include patients with lower extremity conditions in the first half of 2025. From a clinical evidence perspective, in September, we announced the publication of positive clinical trial results among VA patients that assess the use of PlexiTouch for the treatment of their lower extremity lymphedema over the course of one year. This was the largest prospective clinical trial investigating PCVs and lymphedema ever published in the U.S., And the results demonstrated significant improvements across primary and secondary study endpoints, including increases in lymphedema quality of life scores, reductions in limb growth, cellulitis events, skin hyperpigmentation, and high compliance with therapy. Further, mild lymphedema was the most common disease stage among this study group, presenting in 68% of patients. This is important as it shows the value and clinical efficacy of FlexiTouch earlier in the care pathway. Our ongoing RCT assessing FlexiTouch for head and neck lymphedema is also progressing well and remains on track for an initial data readout in early 2025. This is the largest study ever conducted among this patient group, and we look forward to communicating the results as soon as we are able. Delivering speed and efficiency in the sales and order management process, launching and supporting innovative therapies and solutions, and generating peer-reviewed evidence and patient advocacy supports are foundational elements for improving access to care. Having served over one million patients since Tactile's inception, improving access to care continues to be a focus of our work today and will become an even more important cornerstone of our strategy in the future. We look forward to sharing specifics of this refreshed access to care strategy next quarter. In the meantime, we're encouraged by our demonstrated momentum in this area to date and pleased to have a strong balance sheet to support appropriate future investments. Before turning the call over to Elaine, I want to share a brief update on our capital allocation strategy. As communicated during the previous earnings call and mentioned earlier in my prepared remarks, we are increasingly benefiting from generating free cash flow, a trend we expect to continue. This provides us the luxury of continuing to evaluate various investment opportunities to drive growth and increase shareholder value, while also initiating a share repurchase program of up to $30 million of outstanding stock. We believe the strategic action and near-term use of cash aligns with our conviction in the trajectory of our business, as well as our ability to execute our financial and operational initiatives. To be clear, Our strong balance sheet affords us a multitude of options in terms of meaningful capital deployment, and we will continue to evaluate ways to leverage our market leadership and strong commercial and operational footprint to invest in and drive incremental growth. With that, I'll now have Elaine review our third quarter financial results and provide an update on our outlook for the remainder of 2024. Thanks, Sherry.