Q4 2019 Earnings Call
Please standby.
Good afternoon, ladies and gentlemen, and welcome to the fourth quarter of 2019 earnings conference call for Tech how medical.
At this time of participants have been placed in listen only mode.
At the end of the company's prepared remarks, we will conduct a question answer session. Please.
Please note that this conference call is being recorded and will be available on the company's website for replay shortly.
Before we begin I would 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 that could cause actual results to differ materially from those indicated including those identified and the risk.
There's section of our annual report on form 10-K filed today with the Securities and Exchange Commission.
Such factors may be updated from kind of time in our filings with the FCC, which are available on our website.
It takes no obligation to publicly 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 measures that are not calculated in accordance with the generally accepted accounting principles or gap.
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.
I would now like to turn the call over to Mr., Jerry Matisse Tacked on Medicals, Chief Executive Officer. Please go ahead Sir.
Thank you operator, good afternoon, and welcome everyone to our fourth quarter and full year 2019 earnings call I'm joined on the call today by our Chief Financial Officer, Brent My one.
Let me provide you with a brief outline of today's call.
I'll start with a review of our financial performance highlights for the full year 2019.
During which also discussed the primary drivers of our revenue performance.
Following this discussion I'll review, our 2019 operating highlights and briefly summarize our sales performance during the fourth quarter.
Brent will discuss our financial results in detail and review our financial guidance for 2020, which we updated in in our earnings press release. This afternoon.
Then share a few closing thoughts on our outlook in 2024, we open the call for questions.
2019 was another year of excellent performance for tactile medical.
For the full year, we achieved revenue of $189.5 million, representing 32% growth year over year coming in ahead of our guidance range for 2019, which we increased on our third quarter earnings call.
2019 revenue growth was primarily driven by sales of our flexi touch plus system, which increased 30% year over year to $171.3 million.
Sales of our Entre systems. We're also an important contributor to our total company revenue growth in 2019, increasing 54% year over year to $18.2 million.
As a reminder, our revenue results in 2019 were impacted favorably by the adoption of the least new lease accounting standard E. S. C 842, which Brent will discuss in detail during his remarks.
Excluding the impact of assay 842, our revenue increased 28% year over year on an operational basis in 2019.
Our next our revenue growth in 2019 benefited from several important drivers that we have shared with you on prior earnings calls.
First and foremost the expansion of our sales team sales team was a strong contributor to our success in 2019.
By year end, we managed to exceed our hiring goal for the year, ending 2019 with more than 240 reps compared to more than 200 reps at the end of 2018.
Our pace of hiring in 2019 is evidence of the improvements we've made in our process for recruiting hiring and Onboarding new talent.
And we expect these additions will continue to fuel our growth moving forward [noise].
Second the strong market adoption of our flexi touch plus system, which we launched in the second quarter of 2018.
We continue to receive feedback from prescribers and customers that are third generation flexi touch system with its improved garments and controller and strong clinical evidence is the best nomadic compression device on the market.
Its ability to treat to lake simultaneously has led to increased adoption from new clinicians as well as existing clinical customers.
Who were previously prescribing computing devices for bilateral therapy.
Third our targeting strategy to focus our sales reps on the highest diagnosing accounts in our market.
During 2019, we were successful in expanding our penetration of these target accounts and we continue to see a lot of greenfield opportunity with respect to this targeting strategy as I will discuss later in my remarks.
And lastly, our broad in network coverage with commercial payers.
We began 2019 as an in network provider for over 275 million U.S. lives or approximately 90% of the insured population.
Allowing us to provide our systems to patients covered under commercial insurance plan at a lower out of pocket cost.
We complemented our strong 2019 sales performance with growth gross margins of 71% consistent with our 2019 target of gross margin in the low seventies.
And improvements in our profitability profile, including.
A 210 basis point improvement in adjusted operating margins year over year.
And adjusted EBITDA of $25.3 million up 46% year over year.
Turning to an overview of our operational performance in 2019.
In addition to our flexi touch plus system.
During 2019, we continue to experience demand for flexi touch head and neck from customers and lymphedema clinics and the V.A., where our sales team is focused on selling this product.
Sales of Flexi touch head and neck increased nicely and remain at the low to mid single digits as a percentage of our total revenue in 2019 consistent with our expectations.
The same time, we focused on building our portfolio of clinical evidence with the goal of completing and submitting three clinical publications in 2019 in order to support our pursuit of expanded reimbursement coverage and widespread adoption of flexi touch head and neck.
We published a clinical study of flexi touch head and neck in the journal Auto Leerink allergy head and neck surgery and completed manuscripts for two additional studies, which we expect will be published in the first half of two of 2020.
With respect to the newest addition to our product offering the airware compression Garmin in 2019, we focused on securing our supply chain in preparation for our limited launch, which I'm pleased to announce we began in the fourth quarter.
We acquired this product in part because of customer and clinician feedback identifying the need for a static compression garment that's easy to put on and comfortable aware.
We found airware to be the best data compression garment on the market and the feedback that we receive from customers and clinicians has reinforced this view.
By creating a more comprehensive product offering for lymphedema management, we also see an opportunity to establish relationships with patients early in their treatment of lymphedema.
Lymphedema is chronic and progressive.
Patients that are currently using static compression garments may ultimately transition to the use of the pneumatic compression device and our goal is for tacked on medical to be considered a familiar and trusted brand able to meet all of their therapy needs.
Well in the early innings of our full launch feedback from patients inclinations confirmed the appeal of our Airware product.
We intend to use the insights from our limited release, the fully leverage our ability to help patients earlier in their treatment cycle and also drive pull through of our flexi touch systems when appropriate.
We also expanded our efforts in 2019 to raise awareness of lymphedema and our treatment solutions through the development of new medical education programming and clinical publications.
First we increased our educational programs by more than 60% compared to the prior year.
Our programming in 2019 included a variety of events focused on educating clinicians within the medical community such as vascular in head and neck specialists that are likely to be involved in the diagnosis and treatment of lymphedema.
We also continued to support the development and publication of New research to improve the medical community is understanding of lymphedema, including its co morbidities and prevalence as an under diagnosed and undertreated condition.
On our Q3 earnings call, we announced the publication of a new study in the September 2019 issue of the journal of vascular surgery, Venus and lymphatic disorders, titled Lymphedema associated co Morbidities and treatment gap.
This study included de identified data from nearly 27000 patients with lymphedema and was the largest study to date detailing the co morbidities associated with limited the EMA and the lymphedema treatment rage within each co morbidity according to IHS researchers.
Good identified notable treatment gaps for lymphedema patients with specific co morbidities, such as venous leg ulcers, helping to advance the medical community is understanding of such treatment gaps.
This month, we also announced the publication of a study in the journal of vascular surgery, Venus and lymphatic disorders, which highlights the large under diagnosed and underserved population living with chronic venous insufficiency or CVI related lymphedema also.
I notice Leabo lymphedema.
This study titled the clinical characteristics of lower extremity lymphedema in 440 patients.
Was a three year single center retrospective study the documented the prevalence and manifestations of the for most commonly encountered causes of lower extremity lymphedema patients who presented to an oncology affiliated physical therapy Lymphedema Center.
Researchers found at CVR why was the most common cause of lymphedema responsible for 41.8% of lower extremity lymphedema cases.
While cancer has historically been considered to be the most common cause of lower extremity lived the EMA.
The findings of this study highlight the potential large population of patients with Leabo lymphedema and the need for further research and increased awareness of this condition.
Importantly, the researchers this study suggested that the prevalence of fleet. Both emphysema is approximately 16 million in the U.S. alone, citing prior literature estimating that 5% of the population has some skin changes associated with CVI.
[noise]. This implies that the estimated prevalence of lymphedema in the U.S. is considerably larger than previous estimates of 5 million and highlights the need for increased awareness across the medical community to address this much larger under diagnosed and underserved patient population.
Yeah.
Moving to a brief review of our financial performance in the fourth quarter.
We were pleased to bring to the year to a strong close with fourth quarter revenue of $57.1 million, representing 23% growth year over year.
Q4 revenue was due primarily to sales of our flexi touched systems, which grew 21% year over year to $51.6 million, coupled with contributions from sales of our entre systems, which grew 48% year over year to $5.5 million.
Like the primary drivers of our 2019 sales performance our growth in the fourth quarter benefited from strong sales to commercial and Medicare patients.
As a reminder, during the fourth quarter, our salesforce tends to focus their efforts heavily on patients covered under commercial insurance plans that have met their annual deductibles, which reduces the out of pocket cost of our system.
In the fourth quarter sales of our entre products continued to benefit from our strategic shift to transitioning order processing from our field team to our internal team of specialist, which allows our field Sep sales representatives time to focus on driving sales of our flexi touched system.
We have seen tangible improvements in productivity as a result of this strategy and we plan on identifying additional ways to enhance the productivity of our Salesforce this year.
Let me now I'll turn the call over to Brent to discuss our fourth quarter financial results in greater detail and review, our 2020 guidance, which we updated in our press release this afternoon Brent.
Thanks Jerry.
Total revenue in the fourth quarter increased 23% to $57.1 million compared to $46.4 million in the fourth quarter of 2018.
Our total revenue performance in the quarter was driven by an increase of $8.8 million or 21% year over year in sales in rentals of our flexi touch systems, and an increase of $1.8 million were 48% year over year in sales and rentals of our.
Entre systems.
The increase in our flexi touch revenue was largely driven by the expansion of our sales force.
Increase physician and patient awareness of the treatment options for Olympic EMA.
Broad in network coverage with insurance payers and growth in the number of Medicare patient served.
The growth in sales of our entre product benefited from the strategic shift to manage these orders in house as Jerry discussed earlier.
Sales and rentals of our flexi touch systems accounted for 90% of our total revenue in the fourth quarter of 2019 compared to 92% in the prior year.
Fourth quarter revenue by payer was 75% commercial 13%, VJ and 12% Medicare compared to 70%.
18% and 12% respectively last year.
As discussed on our earnings calls throughout 2019, we adopted the new lease accounting standard SC 842.
Which became effective on January Onest 2019.
The adoption of assay 842 did not require us to restate any of our prior periods.
The impact of the company's adoption of assay 842 was not material to the year over year increase in total revenue in the fourth quarter of 2019.
Turning to the rest of the PNM.
Fourth quarter, gross profit increased $9.1 million or 28% to $41.4 million compared to $32 million last year.
Gross margin was 72% of sales in the fourth quarter of 2019.
Paired to 69% of sales in the fourth quarter of 2018.
The increase in gross margin was primarily attributable to revenue mix by product and payer compared to last year as well as a 700000 dollar noncash inventory write off related to our active touch assets recorded in the fourth quarter of 2008.
Team, which did not impact our gross margins in the fourth quarter of 2019.
Fourth quarter operating expenses increased $5.2 million or 17% to $35.1 million compared to $29.9 million last year.
The increase in operating expenses in the fourth quarter was primarily driven by a year over year increase of $4.6 million or 26% in sales and marketing expenses due to the continued investments in the field sales team and marketing initiatives to increase costs.
Mission awareness.
The increase in operating expenses was also impacted by higher reimbursement general and administrative expenses, which increased $700000 or 6% to $11.5 million compared to $10.8 million last year.
This increase was primarily due to personnel related expenses, resulting from the additional headcount in our reimbursement operations payer relations.
Patient services and corporate functions.
Also that the change in year over year reimbursement general administrative expenses.
Were impacted by two non operating items.
Q4, 2019 resulted results included a one time charge of $1.1 million related to the lease termination of our former corporate headquarters.
And our Q4 2018 results included an intangible asset impairment charge of $1.8 million related to our active touch assets.
Excluding these two non operating items, our fourth quarter reimbursement and gene a expenses increased 15% year over year to $10.3 million.
Operating income for the fourth quarter of 2019 increased $3.9 million were 183% to $6 million compared to operating income of $2.1 million last year.
Excluding the 1.1 million dollar one time lease termination charge.
And the 2.5 million dollar noncash actually touch inventory write off an impairment charge in the fourth quarters of 2019, and 2018, respectively. non-GAAP adjusted operating income increased $2.5 million or 54 per.
Percent year over year to $7.2 million in the fourth quarter of 2019 compared to $4.7 million in the fourth quarter of 2018.
We recorded an income tax expense of $1.9 million for the fourth quarter of 2019.
Compared to an income tax benefit of $84000 last year.
The tax expense recognized in the fourth quarter of 2019 was primarily related to decreased tax deductible share based compensation compared to the prior year.
Net income for the fourth quarter of 2019 increased $1.9 million or 82% to $4.3 million or 22 cents per diluted share compared to net income of $2.4 million or 12 cents per diluted share for the fall.
Fourth quarter of 2018.
Weighted average shares used to compute diluted net income per share were 19.7 million and 19.5 million for the fourth quarters of 2019 and 2018, respectively.
Fourth quarter, adjusted EBITDA increased $2.1 million or 26% to $10.4 million compared to adjusted EBITDA of $8.3 million in the fourth quarter of 2018.
Our adjusted EBITDA margin was 18.3% in the fourth quarter of 2019 compared to 17.9% in the fourth quarter of last year.
As a reminder, we've provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.
Turning to a brief review of our results for the full year 2019, total revenue increased $45.7 million or 32% to $189.5 million compared to $143.8 million for the full year.
2018.
In the full year 2019, the adoption of AMC 842 benefited our total revenue growth by 3.7 percentage points.
The increase in total revenue was driven by an increase of approximately $39.4 million or 30% year over year in sales and rentals of the flexi touched system, and an increase of $6.4 million or 54% in sales and rentals of the onto.
Great system.
2019 revenue by payer was 72% commercial 17% BA, 11%, Medicare compared to 71%, 20% and 9% respectively last year.
Net income for 2019 increased $4.3 million or 66% to $11 million were 56 cents per diluted share compared to net income of $6.6 million or 34 cents per diluted share for the full.
A year 2018.
Weighted average shares used to compute diluted net income per share were 19.6 million.
And 19.3 million for the full years 2019, and 2018, respectively.
Adjusted EBITDA for 2019 increased $8 million or 46% to $25.3 million compared to adjusted EBITDA of $17.3 million for the full year 2018.
Adjusted EBITDA margin for 2019.
Increased 130 basis points to 13.3% compared to 12% for 2018.
At December 30, Onest 2019, cash cash equivalents and marketable securities were $45.2 million compared to $45.9 million at December 30, Onest 2018.
The company had no outstanding borrowings on its 10 million dollar revolving credit facility at year end.
Let me now turn to review of R 22020 guidance, which we updated in our earnings released this afternoon.
For 2020, we expect total revenue in the range of $227.5 million to $230.5 million, which represents growth of 20%, 22% year over year compared to revenue of 189.5 million in 2000.
19, our 2020 total revenue guidance assumes that the adoption of assay 842 will be a headwind to our full year revenue.
As a reminder, our full year 2019 revenue included approximately $5 million of rental revenue related to rental agreements commencing prior to December 30, Onest 2018, which were recognized as month to month operating leases in 2019.
It will not contribute to the company's revenue results.
Going forward.
Excluding the 5 million dollar contribution to full year 2019 revenue.
The 2020 revenue range reflects year over year growth of approximately 23% to 25% on an operational basis.
We have included a reconciliation table detailing the projected 2020 GAAP revenue growth rate to the projected 2020 non-GAAP revenue growth rate in our earnings press released this afternoon.
By products, our 2020 total revenue guidance range assumes sales of our flexi touch products increased approximately 20% to 21% year over year in 2020 and sales of our other products, specifically entre and Airware increase the proxy.
Currently 24% to 27% year over year in 2020.
In terms of the anticipated contribution of our new products, we expect head and neck sales in the low to mid single digits as a percentage of total revenue.
And we expect sales up airware to be immaterial and 2020.
Turning to the PNM now for the full year 2020, we expect our gross margin to be in the low 70% range.
And our adjusted EBITDA margin to be in the range of 14% to 15%.
This this adjusted EBITDA range assumes stock based compensation expense of approximately $12 million.
For the purpose of calculating earnings per share, we expect our fully diluted weighted average share count in 2020 to be approximately 20 million shares.
Finally, I'd like to remind investors that our business experienced a significant quarterly seasonality each year as we move into the new year with Q1, and Q4, representing our smallest and largest revenue volume quarters, respectively. Each year.
Over the last three years, our first quarter revenues have ranged from approximately 18% to 19% of total annual revenue on a normalized basis.
For Q1, 2020, we would expect revenue to be at the higher end of the historical range of full year revenues or approximately 19%.
A full year 2020 sales, notably the first quarter of 2019 includes approximately $2.8 million a benefit from our adoption of assay 842.
With that I'll now turn the call back to Jerry for some closing remarks Jerry.
Thank you Brent.
In summary, we're excited by the achievements we have made this past year and in 2020, we look forward to continuing to drive commercial execution operational progress and increased awareness of our technologies in the market.
Our 2020 guidance reaffirms, our commitment to delivering 20% plus revenue growth and improvements in our profitability. The long term goals, we've executed against since our initial public offering in 2016.
We continue to see compelling evidence as we did back then that we are focused on a market that is both vastly underpenetrated and expanding at an impressive rate.
In December of 2019, we conducted another analysis of US medical claims data, which showed that there were 1.3 million patients diagnosed with lymphedema in the 12 month period, ending June 32019, an increase of 18% in one year.
This updated analysis suggests that the annual number of patients diagnosed has grown at a compound annual growth rate of 12% over the last five and a half years compared to the 700000 patients diagnosed in the 12 month period ending December 3rd.
30, Onest of 2013, which was the first period of data we evaluated.
Importantly, the 1.3 million patients diagnosed represents a 5 billion dollar plus addressable us market opportunity. One that we believe remains very underpenetrated with only 40000 flexi touch systems shipped during 2019.
In 2020, we will continue to capitalize on this vast opportunity by focusing on the primary drivers that a fueled our rapid growth in recent years.
We will leverage our recent salesforce hires and continue to expand our sales team headcount with the addition of approximately 20, new sales representatives with a goal of hiring the majority of these reps in the first half of 2020.
We will continue to enhance the productivity of our sales reps by increasing our coverage and penetration of the high diagnosing accounts in our market.
The medical claims data that we pulled in December of 2019 reflects two encouraging themes that give us confidence in this strategy.
Recall that based on our prior claims data pull in December of 2018, we estimated we were doing business with at least one clinician nearly 50% of the more than 4700 high diagnosing facilities in the United States.
Based on the 2019 data we now estimate we are doing business with more than 60% of these high diagnosing facilities.
Similar to our prior data analyses are recent medical claims data continues to point to notably strong growth in the number of high diagnosing facilities in the us.
Trend is encouraging as we believe that reflects the growing awareness of lymphedema among clinicians and represents an expansion in the number of potential customers to enhance our commercial targeting efforts.
Our efforts in moving the ordering responsibility for entre to our internal team will accelerate in 2020, freeing up time for our reps to focus on serving flexi touch patients and lastly, we'll continue to benefit from our broad in network coverage with commercial players Payors.
Before I conclude my remarks today I'd like to briefly discuss news that we announced since the end of the year.
First the judge overseeing the lawsuit that was filed by a competitor last January chose to allow the suit proceed.
While we would've preferred to see the suit dismissed we look forward to the opportunity to defend ourselves against these frivolous allegations.
So believe strongly that we will prevail in this case.
The other news, we announced last month was that I announced my intention to retire in 2020.
It's truly been my pleasure to lead tacked on medical for 15 years and witness our accomplishments. During this time of benefit for the benefit of our patients customers and shareholders.
I have great confidence that our board of directors will find an inspirational leader to continue our strong trajectory and look forward to continuing in my role until my successor is identified and then work with him or her to ensure a smooth transition.
I'm also proud to say that tacked on medical is extremely well positioned for future success.
The markets that we're serving our growing.
Evidence of the superiority of our products is growing.
And the awareness of the consequences of untreated lymphedema is growing.
Importantly, we have a strong senior management team with a demonstrated ability to execute tenured sales reimbursement and operations personnel and a time tested growth strategy to further capitalize on these market dynamics.
I'd like to close by congratulating the tacked on medical team on a job well done in 2019 and expressing my thanks to our patience clinicians payors shareholders and those on this afternoons call for their interest and support.
Operator, we will now open the call for questions.
Thank you.
I would like to ask a question. Please press star one on your telephone keypad.
We are using a speakerphone. Please make sure function is turned off to allow your single to reach our equipment. We do ask that you limit yourself to one question and one follow up.
If you would like to ask additional questions. We invite you to add yourself to the you to the Q again by pressing star one.
And our first question comes from Margaret CAC store with William Blair. Please state your question.
Hi, Good afternoon, guys. Thanks for taking my question.
So maybe the first one for me is on guidance.
So if we exclude from the actually eight for Q impacts looks like that's coming in in the mid 20% range, which frankly is stronger than you guys have typically guided to at this point in the years, So Bob I understand that sales our productivity improvements and so on that could drive that growth.
The main Gelclair is there something else, you're saying in the field that can see greater comp.
Hey, Margaret Thanks for the thanks for the question.
We certainly.
Like and believe that increasing the head count in the field is a key driver of growth in 2020, I would say the productivity that we're seeing by both leveraging the in house scheme to process those.
Entre and Medicare orders to free up product specialists time is working very very well and this targeting strategy, which we've been talking about now for a couple of years is really starting to pay off and you can see that in the in the data that I shared a little earlier.
So I think our success in penetrating these important accounts, where we've gone from nearly half penetrated.
At the beginning of 2019 to now more than 60% penetrated at the end of the year speaks well to why we are bullish about.
2020 guidance.
Okay. So that's helpful. And then that brings me kind of follow up question, which has to do with kind of at the high diagnosing collections as well as the updates on both of which were very good so.
Your first part of the question is on the high diagnosing account.
Yes.
The market growth is already high teens. These accounts are growing faster than that which means that you guys get to benefit from that dynamic but in terms of the growth drivers.
How do we think about that whole thing that rep productivity and profitability for you guys and then kind of the side question on Pam is that CVI related lymphedema trial 16 million patients is quite large so what are the next.
You guys need make strategically to.
You see more material impact in numbers.
Thanks.
Great. Thanks, good good couple of questions on the first one the new data when we are able to convert one of these high diagnosing clinicians to begin prescribing our flexi touch system. They tend to order twice the amount of product as our average occur.
So this has been a very fruitful way to focus the sales team and get them to utilize better utilize the time that they have so the new data suggests growth in the number of patients diagnosed the number of high diagnosing clinicians the number.
For a clinics and.
Most importantly, the number that we've penetrated so I think those are all very positive elements going into 2020.
The second question.
It was around that.
The fact that CVI induced lymphedema or fleet IPO lymphedema was is traditionally not been thought of as the primary cause of lower extremity lymphedema.
Our activities and our focus over the past year and a half the two years has been on trying to reach the vascular physician.
That vascular dock is the one who sees these patients with chronic venous insufficiency. So we're focused on them now and this just gives us more evidence to go into those accounts and help them see the lymphedema that they're seeing in these patients every day.
Do you think the data.
Compelling enough to try to drive adoption and is this specific data such as one of money that or do you find it's the kind of both.
Hi, capitulated point potentially for growth. Thanks.
I think it's a nice inflection point for teeing up the awareness of lymphedema in this population of patients with poor circulation. So I would say that most vascular physicians don't look for lymphedema touch.
Okay and with this evidenced now we can go in and convince them that they're missing it and that they have an opportunity to really.
Be more be more aware of the problem and of our solution.
For that for this patient.
So we're very excited about those new prevalence data.
Thank you. Our next question comes from Chris Pasquale with Guggenheim. Please state your question.
Thanks.
Jerry you guys added 40 reps in each of the past two years and it seems like there's still plenty of runway to expand your footprint, if you're only calling on 60% of your potential customers. So what's the thought process behind dialing that back to 20 this year.
Hey, Chris Thanks for the question. So we actually set out to higher 30, more reps and in 2019 and ended up finding 10 more through our recruiting efforts and decided to bring them on ahead of time, so we've been saying about.
30, a year is kind of though what we'd like to be able to continue to drive toward so that 10, plus the 20, we just mentioned in the in the call today gets us to that 30 number that's how we've been thinking about it.
Okay. So you pulled forward some of the hiring from 20 into the back half of 19 essentially.
Into that last fourth quarter actually yes yep.
And then my second question. So it looks like the sales declined about 9% in the quarter could you talk little about what you're seeing there how much of that weakness is related to the disruption from the QEPM Sue.
And with the suit now looking like it's going take a little while to resolve.
How are you thinking about that segment of the business in 2020.
Yes.
Good question, so sales to the VA late in the fourth quarter were about 7.6 million of the 57.1, we had in the quarter. So roughly about 13% of our sales we did see a decline driven by underperformance and really just one of the regions.
Of the company.
Which offset better results around the rest of the country.
There's no doubt the key Tam lawsuit has impacted results again in the fourth quarter.
But we had strong growth outside of those areas that werent anywhere near the where this was filed so that's what that's what has us optimistic about sales going into 2020.
We don't really.
Forecast or we don't really model by payer because we had shown the ability of our sales organization to pivot to the most.
So the sales that are available in their specific territory.
But weve experienced some really nice.
Performance in the VA outside of that one region, so from a growth perspective.
We're starting to lap that headwind, which started unfortunately at this time last year.
And I would say one of the things that we're most excited about is we actually saw a new set of data presented in November at the Veith Conference in New York, which was the first V.A. specific data showing very compelling results for the.
This veteran population. So we're now able to RMR 240 reps with new data that they can go back into the V.A. and make the case as to why flexi touches the right answer for this veteran.
And I think thats going to get it back on the a little bit more of a growth trajectory than than what we saw in the fourth quarter.
Chris its brand to adjusted kind of recap what happened that also in Q4 2018. So.
If you recall in 2000.
18 last since September on we got our flexi touched plus system on the federal supply schedule. So it really drove what I'd consider to be higher than anticipated growth in the fourth quarter of 2018. So the comp comparison Q4, 18, Q4 19 was a little.
So.
A little distorted and certainly we don't believe that one quarter drives a trend in terms of where where we think the opportunity lies in the BA.
That's very helpful. Thanks, guys.
Thank you.
Our next question comes from Ryan Zimmerman with BTI G. Please state your question.
Great. Thanks for taking the questions.
On this call so just to start Jerry and Brent.
Airware will be immaterial this year, but if you could just talk about the recurring revenue opportunity for Airware as you think about it.
Outer years, and what type of gross margin impact.
Potentially present for the company good or bad.
Consider that I've, a follow up on how to thank you.
Thanks, Ryan I appreciate the question and happy to answer that.
Specific to Airware.
So as you May remember, we had a very limited launch going on in 2019 with very positive feedback from both clinicians and patients who use that during that time.
We're on our way to a full commercial launch, but I think the thing that makes us most excited about this product.
Is the fact that we get access to the patient earlier in their treatment cycle and once we have patient access we can begin educating them on what some of their other treatment options are including our flexi type system.
So it is true that these patients can get reimbursed for this product on up about an every six month basis.
And this would represent what I would say our first opportunity for some.
Consumable type sales.
It is a low average selling price. So we don't want to distract the sales organization too far off of their call point when there when they have an opportunity to sell a flexi touch but because of its recurring nature. We're excited about what this can do for the company. We've said it's kind of.
Immaterial for for 2020, because we think it's going to take a while to catch on but think it will be more meaningful as a contributor once we roll into 2021.
Hey, Ryan as Brent so from a gross margin perspective.
Airware is in precisely the same ZIP code as our overall corporate gross margin. So don't anticipate that theres going to be any any significant impact on gross margin as we rollout airware.
In 2020 and beyond.
Okay. Thank you and then just my follow up question.
How did that you guys called out kind of being on a same.
And what percentage of sales this year as it was last year, so plenty of growing in line with with where the rest of is growing but given the opportunity.
Focused on clinical data you have some more publications coming out in the first after this year what is it that influx.
And then head and neck higher in your view.
As we move into the back half a 2020 and then into 21. Thank you.
Yep really good question. So you summed up well that our current focus is on building the portfolio of clinical evidence.
Not only drive watt more widespread adoption of flexi touch head and neck, but also give us the opportunity to go gain expanded reimbursement coverage you may remember that today, we're only billing for the controller and we're not billing for the garments.
That.
We certainly see our way the changing that and why we're so focused on publishing clinical evidence to allow us to approach the CMS and ask for unique codes for those head and neck garments, we believe that will be inflection point.
For the company's ability to convince more clinicians that this ought to be the product that they're thinking about for their patients with head and neck lymphedema.
So we've published one study and the journal Auto Leerink LNG head and neck surgery, we've got to more manuscripts that have been submitted and we are doing additional clinical.
Study development. So we believe will be very well positioned to go ask for those codes. Yet this year. So in 2020 will ask CMS. They usually opine on these in the first quarter of the following year, So 2021, which we should gain or.
Our.
Coding decision.
At which point, we then go out and get the opportunity to.
Work on coverage policies with payers across the country.
While those codes are becoming effective and they would become effective in January of 2022.
So thats the cadence that we see for the head and neck product.
Thank you.
Our next question comes from Matt O'brien with Piper Jaffray. Please state your question.
Thanks, so much thinking that questions.
Just a follow up a little bit few questions asked earlier, Jerry should we expect headed Mac.
Or the new expanded indication.
Target market that you've talked about today impact the business first and what kind of timing or you think if you think in heading back next year in the credit based population maybe more like 22.
So I think we will see continuing growth out of the head and neck product.
Through this year and through 2021, but I think what Ryan was getting at is what is the inflection point and we see that as 2022, Matt.
So I think.
Once we have coding in place coverage in place that's when.
Clinician adoption should really accelerate and this is a large and served.
Market opportunity because these patients with head and neck lymphedema really don't have any other options to treat this condition.
So we think we're in a great place, we just want to make sure we get the evidence behind us before we pushed down too far on the accelerator.
Okay, and then the new indication would probably be sometime after that is that fair.
Okay.
Yes.
New indication for what Matt just to clarify.
Extra 50 million patients that you're citing today.
Oh, yes, so that actually is a current indication for the product.
Our product is already.
Cleared to market to treat chronic venous insufficiency, and specifically with especially with those patients that have venous ulcers. So we don't have to seek additional clearance to be able to serve that market.
Yes, Im sorry, I don't.
So.
Okay and between calls a little bit so.
With that scripted Soc about was I think yet clinical data that's associated with it and I.
I think it to do opportunity to kind of go after newer patients that expands.
The yes.
But you're going to go after that group sometime.
It now is it 21 42 out to about that and how meaningful.
Yes, we think it's really meaningful and it's one of the reasons that were more bullish on our 2020 guidance than we've been historically.
We are calling on the vascular community today and they are the ones who see this CVI induced lymphedema our fleet will live at the EMA. So we expect this will drive sales yet in 2020.
And why we're so bullish on.
Our performance this year.
Got it that's helpful and then.
A follow up here.
If I look back 2018, and I think a lot of people are really worried.
Yes, thinking about that productivity per rep. Jerry you are kind of talking about here, but 2018, you increase productivity per rep.
$65000 per Rep, you need to do about that same thing this year that $65000 per rep.
To get to your guidance so.
Is that bilateral that's going to lead the charge there is at this.
CVI group.
Combination how do we just get really comfortable that with all these new rep.
Disrupting some.
Some territories that you can drive that level of productivity from a product perspective.
Yeah, I think it's a really good question. So we see the probably the biggest driver of productivity being able to take the burden of some of the paper work from our field team to an internal group.
So ill begin that process about 18 months ago with a with a pilot.
Let me try to get the internal team processing orders for Entre and most of those go to the Medicare patient population because of medicare's requirement that a patient has a trial of a simple device before moving up to a flexi touch. So we started it then it access.
Celebrated in in 2019, and it's one of our key.
Initiatives for 2020 growth is to leverage this in house team to process. These orders and free up the product specialists. So they can go sell flexi touch you will remember that flexi touch has basically a three to four times.
Increase in the in the average selling price compared to an entre. So the more we can free up their time to go sell that the better served that we are.
Got it thank you.
Just a reminder to ask the question press Star one on your telephone keypad.
Our next question comes from Jason Mills with Canaccord. Please state your question.
Hi, John you online for Jason Thanks for taking my question Hi, Firstly on can you give an update on your internationally initiative.
Commercial infrastructure standpoint, as log markets, we believe our most spread over specs you touched near and medium term wedding could sales material contributor to growth in overall business.
Yes, you bet John Thanks, everyone welcome to the call.
We continue to.
To pursue our international opportunities, we do not expect a commercial contribution in 2020, though.
You May remember, we had our product approved for the CE Mark before Europe changed their medical device directive and we have just completed our quality system audit.
To that new standard.
We expect to get the results from that audit back here in the next 90 to 120 days at which point will react to whatever they say and we expect that by the end of the year, we'll be able to put the CE mark on our products for sale in Europe, Europe is going to be the initial focus.
For us going forward, but again.
End of end of 2.2 thousand 24, the ability and revenue not really likely this year at all.
Expect that to begin sometime in 2021.
Great. Thank there and then for my follow up as you go far beyond points by how do you think about rep productivity in the head and neck opportunity potential additional resources, they look to AG really cap.
Okay.
Thank you John we we are still of the belief that we can put.
322 to 350 reps into the field and have them be productive. This is a growth opportunity. So we are continuing to invest heavily in sales and marketing.
We do expect leverage from some of our other.
Areas on the PML, but not really from the sales and marketing line.
Because we're really focused on growth there.
We'll get we will get productivity enhancements as I mentioned to the last.
Question, but our focus is really on expanding the sales organization and continuing to reduce the size of the territories that are reps cover, which we think makes them more productive and frankly.
Better at their job.
Thank you that's helpful.
Thank you.
That does conclude our conference for today.
Thank you all for your participation.