Tactile Systems Technology Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 7 speakers on the call.

Operator

Please stand by. Welcome, ladies and gentlemen, to the Second 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.

Operator

I would now like to turn the call over to Sam Bensiger, Investor Relations at Gilmartin Group for a few introductory comments. Please go ahead.

Speaker 1

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 Birkemeyer, Chief Financial Officer. 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, which could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our Annual Report on Form 10 ks 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.

Speaker 1

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 those 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 our earnings press release on the Investor Relations portion of our website. With that, I'll now turn the call over to Sherry.

Speaker 2

Thanks, Sam. Good afternoon, everyone, and welcome to our Q2 2024 earnings call. Here with me is Elaine Birchenmayer, our Chief Financial Officer. I'm pleased to report strong Q2 performance across both our top and bottom lines as well as improvements in our operating cash flow. Specifically, Tactile achieved total revenue of $73,200,000 in the 2nd quarter, representing 7% growth year over year.

Speaker 2

By product line, lymphedema revenues increased 8% year over year to $64,700,000 and airway clearance revenues increased 2% year over year to $8,500,000 We delivered strong adjusted EBITDA with over 49% year over year increase, reflecting our focus on profitably scaling for our business and operating leverage. From a cash perspective, we increased cash and cash equivalents by $12,900,000 in Q2, tipping our cash balance to $73,600,000 as of June 30, 2024. Finally, each of our key commercial initiatives for 2024 remain on track. These include: number 1, technology and workflow related investments in sales and order operations focused on simplifying and accelerating time to revenue number 2, development and launch readiness of our next generation lymphedema platform and number 3, generation of clinical evidence to support patient expansion. I'll expand on each of these shortly, but I'd like to begin with a few high level remarks.

Speaker 2

This marks my first earnings call as CEO of Tactile Medical. But before I dive in, I'd first like to congratulate Dan Rivers on his well earned retirement and thank him for his measurable impact and meaningful contributions to the company and the patients we've served over the last 4 years. I've had a chance to work closely with Dan as a member of Tactile's Board of Directors since 2021, and his stewardship of the business during the pandemic and through the post pandemic recovery period has been admirable. I'm excited to be in this role and excited about the future for Tactile. The business strengths and opportunities at Tactile are well aligned with my 30 year career in health care at the World Health Organization, Johnson and Johnson and Medtronic.

Speaker 2

My roles have spanned leadership positions in market access and multiple general management positions. The diversity of these roles and disease states have informed my understanding as a complex care continuum and market access drivers. Fortunately, these are growth opportunities for us at Tactile, and they strongly leverage my background. I've spent my 1st few weeks as CEO engaging with external stakeholders and meeting with the executive and senior management teams to get a deeper understanding of what's working and where we have opportunities for improvement. This early experience has reinforced my confidence that Tactile is well positioned to transform to very large and very underpenetrated markets with 2 still woefully underserved patient populations that endure chronic and progressive diseases with life altering consequences every day.

Speaker 2

The market foundations are solid. There's a significant unmet need. Our patients experience an unnecessarily protracted and complicated care pathway from diagnosis to treatment options to successful symptom management. There is so much potential to streamline the care journey. The markets are growing.

Speaker 2

The U. S. Market comprises roughly 2,000,000 patients diagnosed with lymphedema. Additionally, there are an estimated 20,000,000 people who are undiagnosed with lymphedema and struggling to receive a diagnosis and timely treatment. Finally, our therapy is underpenetrated.

Speaker 2

Specifically for pneumatic compression devices or PCDs, less than 8% of diagnosed patients with lymphedema receive a PCD. Product innovation, clinical programs and market access initiatives will continue to be areas of focus to drive appropriate therapy penetration. A growing market and under penetration within our product category are encouraging fundamentals, but it's the patient's unmet needs that drive our sense of urgency. Diagnosed or undiagnosed, lymphedema patients include breast, head and neck, pelvic and other cancer treatment survivors. There are also men and women of all ages with chronic venous insufficiency, obesity, trauma and surgery.

Speaker 2

They experienced significant symptoms of swelling, heaviness and tightness that go beyond cosmetic issues. They face cellulitis, pain, restricted range of motion, limitations on activities of daily living and fibrosis. Especially cruel for head and neck cancer survivors is the difficulty swallowing, speaking and breathing. There is no cure for lymphedema, and their disease is chronic and progressive. Similar to lymphedema, chronic pulmonary disease also represents a large and underpenetrated market with bronchiectasis being the most common, with an estimated 500,000 diagnosed and 4,400,000 undiagnosed patients.

Speaker 2

Bronchiectasis is commonly a misdiagnosis due to the overlap with COPD, and when left untreated, the inability to clear mucus leads to a continuous cycle of infection, inflammation and worsening damage. This status quo is unacceptable to our patients and it's also unacceptable to us. The potential impact from our therapies on patients across these markets is too substantial, and our path to meaningful growth is not only viable, but it will be our reality. I'm excited to continue advancing our mission Tactile, and I see the company at a critical juncture, supported by 3 points. 1st, we are the demonstrated leader in lymphedema therapy solutions with a portfolio of patient focused, clinically proven, nomadic compression therapy.

Speaker 2

2nd, we are advancing the standard of care for bronchiectasis patients with a differentiated portable offering. And third, we have a cohesive and experienced leadership team and a talented and committed professional sales organization. The time is right to refine our growth and profitability strategy, and I look forward to sharing more specifics with you next quarter. With that context, I'd like to pivot back to a review of our Q2 performance, updates on our key commercial initiatives and where our focus lies for the remainder of 2024. Regarding our product lines, we're pleased to see the growth in year over year lymphedema revenue despite a strong prior year comp.

Speaker 2

As a reminder, we added sales reps late in Q1 of this year, and we expect to see their revenue impact materialize more meaningfully in the second half of the year and beyond. Our legacy reps are increasingly due to workflow redesign that aims to reduce non selling activities such as in home patient demos. These demos are increasingly performed by our trained patient education consultants. And this quarter, 45% of in home demos were performed by these consultants versus 35% in Q1 and versus 30% at the end of 2023. We remain committed to our goal of achieving 50% of in home demos performed by our patient education consultants by the end of 2024.

Speaker 2

In terms of our overall lymphedema sales headcount, we ended the Q2 with 264 sales representatives versus 269 at the end of the Q1. While this remains in our target range, we still expect sales headcount in the high 260s to low 270s as we exit the year. With respect to our sales channels mix in the quarter, our non Medicare lymphedema business grew nearly 20%, reflecting growth recovery in the VA and progress with our commercial payers. While we continue to improve our first class claims approval for Medicare patients, our Medicare business was down on a year over year basis in Q2, which is directly related to the increasingly onerous documentation requirements for Medicare administrators. I'll be speaking in more detail about this after I wrap up the Q2 performance highlights.

Speaker 2

Turning to a review of our Airway Clearance product line. Since acquiring Aflo Best just 2.5 years ago, we doubled the size of the business by taking both share and growing the market. The AfloVest product fits well within our portfolio and ultimately expands our ability to reach and serve more patients with chronic conditions in the home. The product's differentiated portable design, the broad DME channel reach, strong reimbursement, targeted medical education and a tenured sales force are the right pieces for continued growth and profitability. In the Q2, we were pleased to see Airway clearance return to growth on a year over year basis following the anniversary of the PHE waiver expiration in May.

Speaker 2

The expiration of this COVID era waiver affected the ordering patterns for 1 of our larger DME customers and has been a modest headwind to growth. Shipments continue to stabilize in the Q2 for this particular DME, and we anticipate a return to non PHE ordering patterns. Speaking of ordering patterns, the Airway Clearance business is a bit more sensitive to stocking patterns as compared to our direct lymphedema business. While we expect modest ebbs and flows within the distributor model, our overall expectation for improved performance in the second half of this year remains intact. Our confidence in this view is grounded in a couple of factors, namely that a majority of our DME partners are continuing to grow.

Speaker 2

In fact, if we exclude the one DME that was the most impacted by the change in PAT, the collective revenue from the other DMEs demonstrates double digit growth on a year over year basis in the Q2. This continues the trend we saw in the Q1. We also have several examples of successful DME partner on boarding. For example, a new distributor came online during Q1 and we are already seeing AfloVest AfloVest as a valuable offering for their large base of patients on oxygen. We expect to see this customer and our other distributor partners continue to grow their AfloVest business as a synergistic product in their portfolio.

Speaker 2

And finally, our Airway Clearance sales organization consists of a very tenured and highly competent team who excel at educating and training our DME reps in bronchiectasis and the role of Aflobez in their care. We have added reps through Q1 and Q2, and we expect this to help contribute to growth. Before turning to an update on our 2024 key commercial initiatives, I'd like to share more details on our Medicare business and recent changes in Medicare's approach to administering the pneumatic compression pump LCD. LCD. This LCD was first established in 2015 and while there have been no additional coverage requirements since then, we are seeing significant changes in the way the MACs are adjudicating claims and increasing their documentation requirements.

Speaker 2

This increasingly onerous approach to how Medicare administers the LCD ultimately impact speed and access to treatment for Medicare patients. Earlier this year, we initiated a pilot with an e prescribing tool, which aims to streamline how we collect and exchange patient medical records with providers during the ordering process. While the change in approach to Medicare documentation was not anticipated, our 2024 tech investment in a flexible e prescribing tool demonstrates our forward thinking approach to automating clinical documentation. We are pleased with the early results of our e prescribing pilot and are advancing broader deployment of the platform later this year, with the anticipated impacts to our business beginning more meaningfully in 2025. In addition to expanding our e prescribing pilot, we'll be working closely with our clinical partners, professional societies, the MACs and CMS directly to advocate for unhindered access for Medicare patients that meet the clinical and LCD requirements for our therapy.

Speaker 2

While we are strategically and operationally addressing the change in approach to documentation by the MACs, our current assessment of the potential impact on the revenue in the back half of year leads us to revise our full year 2024 revenue guidance to $293,000,000 to $298,000,000 As mentioned earlier, the number of patients diagnosed with lymphedema is growing. There is no change to the underlying demand for our lymphedema products, and we have started the implementation of technology to streamline documentation and speed to order processing. As the market leader, we have resources and action plans to help mitigate this recent headwind. As I mentioned in the beginning of our call, there are 3 2024 key commercial initiatives that I want to highlight. The first is technology and work flow related investments in sales and order operations.

Speaker 2

In addition to our e prescribing tool, we continue to advance other tech investments, which are designed to enhance and simplify the order and reimbursement process as well as the patient and clinician experience. Last quarter, we transitioned to a new more efficient electronic method of verifying patient insurance, which contributes to simplifying our workflow and supporting faster time to order completion. Last quarter, we also shared our investment plan in a new CRM tool and partnerships with leading edge tech companies to introduce AI solutions for sales, marketing, operations and service. We are on track with these initiatives and plan to launch the CRM tool at the end of the year. We are modernizing our business infrastructure and ensuring its design serves our internal operations as well as enhancing the patient and clinical experience.

Speaker 2

The 2nd key commercial initiative for this year centers around innovation. Product innovation has been and will continue to be core to our business. And in the Q2, we reached an important milestone with FDA 510 approval of our next generation lymphedema therapy platform. Platform, which we call nimble, remains on track for an early fall 2024 introduction, and we are excited to share a few early details of the product today. Nimble represents the next generation of our entry level Entre Plus pump and was designed specifically to bring an even more friendly consumer experience to our patients.

Speaker 2

It's small and lightweight, enabling portability when patients are outside of the home. Nimble also features connectivity to our Kylie digital app, providing patients a way to track their therapy progress at home and share the results with their care team. Nimble is an exciting addition to our portfolio, and I look forward to sharing additional details on the product and commercial launch next quarter. Finally, from a clinical perspective, we remain very excited about our investments in first of its kind Flexitouch evidence generation. Last quarter, we shared details of the largest lymphedema study in the VA, which was published in the Journal of Vascular Surgery.

Speaker 2

Today, I'm pleased to share an update on our randomized controlled trial assessing Flexitouch for head and neck lymphedema. This study is the largest randomized clinical trial ever conducted among head and neck lymphedema patients, of which there are over 400,000 oral cavity or Parenex cancer patients in the U. S. And 90% of these patients are likely to develop lymphedema. We completed enrollment in April 2024 with 235 patients and are wrapping up the 6 month patient follow-up.

Speaker 2

Once complete, we will analyze the data and communicate results likely in early 2025. These 2024 key initiatives are meeting their milestones and are reflective of our strategy to simplify our business processes and the clinical and patient experience. They also reflect our commitment to new product innovation and clinical evidence. I'm proud of the work that's been done and our employees are excited about them too. I plan on leveraging my experience to ensure these investments are optimized and our strategies capitalize on our existing commercial momentum and scale.

Speaker 2

Now I'll turn it over to Elaine for a review of our Q2 financial results in more detail and an update on our 2024 outlook.

Speaker 3

Thanks, Sherry. Unless noted otherwise, all references to second quarter financial results are on a GAAP and year over year basis. Total revenue in the Q2 increased $4,900,000 or 7 percent to $73,200,000 By product line, sales and rentals of lymphedema products, which includes our Flexitouch and Entre systems, increased $4,700,000 or 8% to $64,700,000 And sales of our airway clearance products, which includes our Aflobez system, increased $200,000 or 2 percent to $8,500,000 continuing down the P and L. Gross margin was 73.9 percent of revenue compared to 70.7% in the Q2 of 2023. Non GAAP gross margin, which excludes non cash intangible amortization in both periods, was 74.3% compared to 71.1% in the prior year.

Speaker 3

The increase in non GAAP gross margin was attributable primarily to lower manufacturing and warranty costs and improving collections reflected in our revenue. 2nd quarter operating expenses increased $2,000,000 or 4 percent to $48,300,000 The change in GAAP operating expenses reflected a $400,000 increase in sales and marketing expenses, a $400,000 increase in research and development expenses and a $1,800,000 increase in reimbursement, general and administrative expenses. Strategic technology investments accounted for approximately $1,000,000 of the increase. These items were partly offset by a $600,000 decrease in non cash intangible amortization and around expense. Operating income increased $3,800,000 or 184 percent to $5,800,000 Non GAAP operating income increased $2,900,000 or 80 percent to $6,500,000 As a reminder, our non GAAP operating income excludes non cash intangible amortization and earnout expense as well as certain non reoccurring operating expenses.

Speaker 3

We provided a detailed GAAP to non GAAP reconciliation in our earnings press release. Other income net increased $1,100,000 or 127 percent to $200,000 The increase was due to higher interest income on our increased cash position and lower interest expense, primarily driven by the retirement of our revolving line of credit at the end of 2023. Income tax expense increased $500,000 or 35% year over year to $1,800,000 driven primarily by a higher taxable income. Net income increased $4,400,000 to $4,300,000 or $0.18 per diluted share compared to net loss of $100,000 or $0.00 per diluted share. Non GAAP net income increased $3,800,000 or 3 80 percent to $4,800,000 compared to $1,000,000 Adjusted EBITDA increased to $9,100,000 or 12% of sales compared to $6,100,000 or 9% of sales.

Speaker 3

With respect to our balance sheet, we had $73,600,000 in cash and cash equivalents and $27,800,000 of outstanding borrowings at the end of the quarter. This compares to $61,000,000 in cash $29,300,000 of outstanding borrowings as of December 31, 2023. Our cash growth was driven by a combination of operating income and an increase in net working capital. Turning to a review of our 2024 outlook. For the full year 2024, we now expect total revenue in the range of $293,000,000 to $298,000,000 representing growth of approximately 7% to 9% year over year.

Speaker 3

This compares to previous 2024 total revenue guidance in the range of $300,000,000 to 305,000,000 representing growth of approximately 9% to 11% year over year. Our updated guidance reflects the impact we are seeing from Medicare's increased documentation requirements that Sherry discussed earlier. Our 2024 total revenue guidance range assumes that growth in both our lymphedema and Airway Clearance product lines will be in a similar range. For modeling purposes, for the full year 2024, we now expect our GAAP gross margins to be approximately 73%, our GAAP operating expenses to increase low double digits as we advance our tech related investments throughout the year net interest income of approximately $800,000 a tax rate of 30% and a fully diluted weighted average share count of approximately 24,000,000 shares. As a result of our continued progress with improving profitability, we now expect to generate adjusted EBITDA of approximately $34,000,000 to 30 $6,000,000 in 2024.

Speaker 3

This compares to previous adjusted EBITDA guidance of $33,000,000 to $35,000,000 Our adjusted EBITDA expectation assumes certain non cash items including stock compensation expense of approximately $8,400,000 intangible amortization of approximately $3,800,000 and depreciation expense of approximately $3,000,000 With that, I'll turn the call back to Sherry for some closing remarks. Sherry?

Speaker 2

Thanks, Elaine. To close, we are pleased with our Q2 performance, but even more excited about what the future holds for Tactile. We are fortunate to have well defined strategies already in place and actionable initiatives underway to achieve them. Over the next several weeks months, I'll be having deeper conversations with our leadership team, spending time in the field with our salespeople and connecting with our physician and patient communities with a goal of refining key elements of our existing strategies and identifying new opportunities to continue driving sustainable and profitable growth. Importantly, I also plan to share greater detail on our approach to capital allocation in the coming quarters.

Speaker 2

As Elaine mentioned, we are increasingly benefiting from a generation of free cash flow, a trend we expect to continue. This not only reflects the maturity of our business and our prudent cash management, but also an opportunity to allocate capital in various ways to increase shareholder value. In the coming months, we will be focusing on evaluating several options to leveraging our strong balance sheet, and I look forward to providing updates on our strategy. With that, operator, we'll now open the call for questions.

Operator

Thank you. We will now be conducting a question and answer Thank you. Our first question is from Margaret Kaczor with William Blair. Please proceed with your question.

Speaker 2

Hey, good afternoon, everyone. Thanks for taking the question. Maybe wanted to touch on guidance first. The range decreased $7,000,000 on the high and low end and it sounds like, correct me if I'm wrong, that all of that was kind of on the Medicare side, more likely Flexitouch. But how should we think about that impacting maybe Q4 versus Q3 seasonality?

Speaker 2

And you were clearly able to offset some of those headwinds this quarter as well as the first. So maybe you can give us a sense of is this getting worse? Are you seeing these trends expand? And then sorry, it's a loaded question, but how do we and when do we expect this to be more normalized? Is it 2025 as some of these documentation elements start to have an impact?

Speaker 2

Thank you. Thanks, Mark. And definitely anticipated this question. So let me break it down into 3 components. So just facts, there's been a really distinct change in the documentation requirements for PCD coverage.

Speaker 2

So Medicare is just demonstrating this increasingly on our approach to documentation, which is requiring more time to assemble the requisite documentation, which elongates the time from Rx to order completion. And this impacts all PCD manufacturers, not just us. This change is really surprising given the fact, as I mentioned before, the 20 15 LCD has not increased its documentation requirements. So this is a new approach. Speaking of approaches, so that's facts.

Speaker 2

Our approach has looked the following. 1st is we're addressing this interpretation change both strategically and operationally. So strategically with policy engagement, with professional societies, MAC, CMS level, etcetera, and then operationally with technology investments such as this e prescribing tool that I shared and we can go into more detail about that too. With the e prescribing tool, we're well into our pilot of that technology and we plan to expand that implementation later in the back half of this year to go more nationally. So that's the second component that I want to share.

Speaker 2

On a third and I'll turn it over to Elaine for more concrete examples of the requested documentation change with CMS, but I really want to emphasize that we see this as turbulence versus an unmitigated headwind. So our non Medicare business grew 20% and our business fundamentals are really solid. It's comforting to me and hopefully all of you that I've had over 20 years experience in both pharm and med device and U. S. Reimbursement.

Speaker 2

So I'm really confident we have the appropriate strategies and action plans in place and we can readily adapt to this dynamic reimbursement environment. You asked about new normal, and is this what we can expect? Medicare policies are always going to be dynamic. And while it's difficult to anticipate sudden changes in interpretation for a long standing policy like this LCD, we're really prepared. Our investments in modernizing technology are designed to be adaptive to whatever requirements are out there and our strategic approach will be to work with MACs and CMS to position therapy, PCD therapy, sorry, for Medicare patients that meet the clinical criteria.

Speaker 2

It takes time to strategically adjust some things and operationally to get everything in place. But the good news is we started this pilot earlier in the year and we'll anticipate seeing more and more benefit come through. And Elaine can talk more about timing of that. But let me first start by asking her to give some examples. So the context of what these documentation change looks like are appreciated.

Speaker 3

Yes, I think probably a long standing requirement has always been the need to do Kansybara therapy. And in the past, documenting that that Konsavrotherapy has occurred was sufficient. And what we're learning through both our claims adjudication as well as regular routine audits is that now we need to document start and end dates, we need to have measurements on those dates. And in fact, also if the conservatory trial extends longer than 4 weeks documentation as to why. So that specificity as you can imagine doesn't always make it into the medical records, which then can cause a lot of rework, both on our part, the physicians and really delays treatment to these patients.

Speaker 3

And so that's why this e prescribing platform, which we're able to then facilitate the appropriate capture that first time is very important. And then in addition to the work that we will be doing from a payer policy perspective, we also believe that these are just owners' requirements that really are a detriment to Medicare patients getting speedy access to treatment.

Speaker 2

One thing just so Margaret, you mentioned Flexitouch only and I just want to correct you that this is for all PCD pumps whether they're basic or advanced. Okay. Thank you. Appreciate that. And then just to touch on the guidance question as well.

Speaker 2

The $7,000,000 on the high end low end, how should we think about that for Q3, Q4? And then your margins obviously were great. Your cash increase was great. I know you referenced you'd give us an update on that later. But as we think about the LRP in 2025, as we think about kind of margin expansion of this story and the cash generation, can you give us a sneak peek of those future plans?

Speaker 2

Thank you.

Speaker 3

So Margaret, I'll address the kind of back half and quarter question and then I'll Sherry can touch on kind of how we're thinking about 2025. So I think you asked the question as to does the cadence change and I would say no. I think we would continue to see sort of our normal sequential growth that we would see in a typical year where Q3 is always a little bit bigger than Q2 and Q4 being kind of the bigger quarter. Again, this dynamic really driven by the fact that co pays become less and less as people progress along their plan year. So we wouldn't expect anything different in that regard.

Speaker 2

As it relates to the LRP, given the guidance reduction, so not going to reiterate or provide any updates today regarding the LRP in 2025. I'm 1 month, 1 month plus 5 days, I guess, to be specific into this new CEO role, and I really need more time to give an informed perspective. I have been and will continue to collect information, be out in the field, talk to both internal and stakeholder constituents and just having more discussions to understand where are we and then where we can go. And that's just going to require a little bit more time for reflection and analysis. I am really encouraged that our profitability and free cash flow profile do mirror the targets that were set out in 2022.

Speaker 2

But as we've shared, the revenue is pacing below due to the increased MAC documentation. So with more time in this chair, I'll be in a better position to comment more specifically on 2020 12 expectations in the next months and quarter ahead. I also think, Margaret, maybe you asked a little bit about the approach. And you didn't use the words, but let me just kind of address, is this conservative or aggressive? The guidance that we're putting out is really based on our current view and

Operator

understanding of the Medicare landscape,

Speaker 2

which again surprised us, because the the current LCD guidance. So this is an updated range that we feel comfortable with. And I appreciate it's a 2% cut in revenue, but it's also on the foundation of really strong business fundamentals, growing market, high unmet need, under penetration. And we're going to address this Medicare issue both strategically really provide any guidance on the LRP or 2025. Okay.

Speaker 2

Appreciate it. Yes. Thank you.

Operator

Thank you. Our next question is from Adam Maeder with Piper Sandler. Please proceed with your question.

Speaker 4

Hi, Sherry and Elaine, congrats on the Q2 results and thanks for taking the questions. And Sherry, welcome and congrats on the new role. I wanted to follow-up on the Medicare documentation requirements, just a couple of kind of clarifying points there. So first, and sorry if I missed this in my prepared remarks, when did this go into a factor? When did you kind of really start to see the change?

Speaker 4

And then I'd be curious in terms of the script to kind of order completion or the elongation of the patient funnel. Can you put more specifics around there? I mean, what is that change in terms of patient funnel? How many days? This would be helpful to get a little bit more granular there.

Speaker 4

And then I had a follow-up. Thanks.

Speaker 2

Sure. I'll let Elaine first kind of speak to when this all started to go from a one off to a trend. So I think as

Speaker 3

you know, we have been closely monitoring all of our adjudication results and in fact that's been a lot of what's attributed to our great success in working down AR, growing cash and improving free cash flow. And we started to see earlier this year, denials related to some of this, what was increased documentation requirements as well as kind of like I said, routine kind of audit practices. And really that evidence just continued to accumulate. And in this quarter in Q2, we realized that we needed to change our criteria and what we require for orders to be processed to reflect what has been growing and mounting evidence of stricter and more documentation there. So it was really sort of I would say a build across the 2 quarters with that change happening in Q2 and when we implemented it.

Speaker 2

What I will say, Adam, is also we talked a little bit about the e prescribing tool. And again, quite forward thinking in terms of getting that in place, just wanting to automate and simplify the process both for our team as well as for our providers. But very insightful as it relates to what is a realistic expectations is that policy environments are going to change. And so now we have this tool in pilot that's going to help us adjust and adapt to whatever the policy requirements are. What we do know from the pilot are a couple of things is one is, we've got the right tool that can get to the specificity of the documents that we need.

Speaker 2

And so we're actually the first partner of this e prescribing vendor to apply the tool to a PCD. And again, so we're laying the groundwork for the appropriate documentation on how that tool works. And we do know that on the pilot that those who use the pilots, we actually saw products shipping faster when patient orders went through the pilot versus on our overall average. So we are confident that when we can get that tool in place that we will see faster shipping times. So this is our future using this tool and the early feedback has been positive both on shipping times as well as on the overall experience.

Speaker 4

That's very helpful color. Thank you both for that. And for the follow-up, I wanted to ask about nimble. Congratulations on the approval. Would love just to hear a little bit more about the commercial strategy.

Speaker 4

I think I heard early fall for limited market release. But maybe just any more specifics you can give us around Nimble, which customers are going to target? Do you have any restrictions or capacity constraints to launch that product? And I guess just bigger picture, how do you think about the impact on the lymphedema business with this new product in the bag? Thank you so much.

Speaker 2

Yes. Thanks, Adam. And I'm glad you asked because another great time to be joining as CEO is on the heels of a 510 approval of this new platform. So you're correct, we're going to be doing a limited launch this fall and are excited to bring this new platform to patients. I got to demo Nimble and the Kylie app and I'm really confident that patients are going to appreciate this lifestyle friendliness attribute.

Speaker 2

It's smaller, it's portable. The connectivity on digital with Kylie allows patients to share data on their progress with their lymphedema directly with their provider and it's a great product introduction altogether. We started the nimble platform with the basic pump and that's very strategic. Owning this entry level space is part of our sustainable growth plan and we're always going to be focused on innovation and technology that meets the patient where they are in the lymphedema care continuum. So that's our starting place.

Speaker 2

We'll be with Entre patients, the basic pump patients and then we'll have an innovation roadmap that will continue to expand that across our other offerings. Right now, the limited launch is going to be targeted in specific geographies, and then we'll go to full launch. We've built, I think, over 900 demo units now. I don't see any constraints at all in our manufacturing or operation side of it. We're ready to go there.

Speaker 2

And a a portfolio and adding it to our P and L. We're confident that it's going to be providing exactly what patients need and it's going to be accretive to our P and L. So we're in a good place and looking forward to sharing more details on the launch in Q3.

Speaker 4

Thank you.

Operator

Thank you. Our next question is from Ryan Zimmerman with BTIG. Please proceed with your question.

Speaker 5

Hi, thanks for taking the questions. This is Izzy on for Ryan. So Sherry, just to start with you, given your appointment about a month ago, can you walk us through some of your near term goals that you have for this new position?

Speaker 2

Certainly. You didn't sound like Ryan. Yes, no thanks for joining the call and thanks for the question. Yes, just 1 month in and so a very intentional and deliberate plan to spend time both internally and externally. Last week I was with customers, have been meeting with not just the executive leadership team, but the senior management team, engagement with the board, product demos, deep into financials, operations.

Speaker 2

So I've really been taking a very intentional approach to learn the business, and go in where we have both the biggest opportunities and some of our pain points as we described with this Medicare issue and fortunate that this is a background. So the language and the strategies are not foreign to me and we'll continue to I'll continue to dive in and continue to expand with the goal on looking to see what is the refinement of our strategy and what are those new opportunities we can put forward. But it's been a really very energizing 1st 30 days.

Speaker 5

Great. Thank you. And just given the strength of the balance sheet today and the cash generation you guys have been able to deliver, why isn't a share repurchase at these levels the right strategy?

Speaker 2

Yes. Thank you for noticing because we also are really excited about where we sit again another great time to join CEO when this nice increasing generation of free cash flow is not only on the balance sheet, but we expect it to continue. Nice thing is cash is cash and you can't fake it and it really demonstrates this improved financial profile that we have, reflects the maturity of the business, we can efficiently scale. Prudent cash management, we can prioritize, tighten where we can and invest in tech roadmaps and initiatives. And then we can invest in growth while prioritizing shareholder value.

Speaker 2

So we have a lot of options in front of us. And in the coming months, I'm really going to be laser focused on evaluating the choices of which share buyback is definitely one of those. And I'll be able to update you. But also need a little bit more time in the chair before we start pulling on all of those levers, but it's a really nice position to be in with the balance sheet as it is affords us a lot of options.

Speaker 5

Great. Thanks for taking the questions.

Speaker 2

Yes. Thank you.

Operator

Thank you. Our next question is from Suraj Kalia with Oppenheimer and Company. Please proceed with your question.

Speaker 6

Sherry, can you hear me all right?

Speaker 2

Yes, I can, Suraj. Hi, good afternoon.

Speaker 6

Good afternoon to you too. So Sherry, a couple of questions. First, this e prescribing tool, I'm just wondering to make sure I understand the workflow for this tool. Your initial point of contact still is the lymphologist or vascular surgeon or someone, then it basically comes back to you guys in terms of prescribing it or entering the information and that is controlled by Tactile. I just wanted to make sure I understand who controls the e prescribing tool, the authenticity and then basically how do you determine the ROI from this e prescribing tool?

Speaker 2

Good questions. I'm glad I'll have a chance to add some clarity here and I'll tag team with Elaine on this. So first, we don't prescribe. So the prescription comes from either the vascular surgeon or it's going to come from the oncologist and that's where the prescription is going to generate. And then when that prescription comes over to us, then we look to do the inpatient demo and then look to make sure that all the documentation is in place so that we can move it through as an actual order.

Speaker 2

What the e prescribing tool does is it's actually an interface with the physician. So it's the physician who is using the tool for the prescription and then documenting these specific requirements that are required, if you will, for reimbursement and coverage. So that's the process. We don't prescribe. This is merely a tool that allows the physician not only to write the prescription, but to put all the documentation that allows it to go through as an order so we can get that first time claims approval.

Speaker 2

I'll have Elaine turn over or I'll move it to Elaine to talk about kind of the ROI and how we saw it as a business investment.

Speaker 3

Yes. And just to clarify, so the e prescribing tool, I think, is can be a little confusing because the word prescribing. So it's a prescription, but it also collects all the appropriate medical record information. So today we rely on our physicians to remember everything that has to get documented. And again, remember this is not a condition that they treat day in and day out.

Speaker 3

So to commit that to memory is difficult. And as it gets more and more requirements get higher and higher, the likelihood one would forget an element becomes quite high. And so we get the information, we review it and we realize something is we can we can put in there. So again, we can make sure it's always reflective of what Medicare and other commercial payers are looking for. So we capture the appropriate information the first time.

Speaker 3

But from a security perspective, all of that is independent and third party. So it ensures everything has the right level of integrity throughout that entire process, both from a confidentiality as well as ensuring the right information along the process. As far as ROI, we looked at it traditionally as far as investment in the platform and really what we saw in terms of our ability to accelerate revenue. We know that we've talked a lot about we make it easier for prescribers. We are able to treat more patients.

Speaker 3

So we expect that we will be able to look at the top line both also from a back office perspective as you can imagine if we have to touch this order less because it comes in with everything the first time. And then 3rd, from a collections perspective, if you have everything that you need, your likelihood of getting paid and reimbursed becomes higher. So it really has a couple of different places where the ROI is generated from this

Speaker 6

follow-up question. So Sherry, during COVID and a little after COVID, a lot of the training was handed out externally. And one of the arguments was, training by in house salespeople or even virtually was yielding dividends. It seems like now

Operator

it's reversed,

Speaker 6

I. E. Being handled by external consultants again. So the 50% bogey, can you help us understand how you'll reach that? What is the rationale in terms of outsourcing half of the training versus presumably all the training?

Speaker 6

Thank you for taking my questions.

Speaker 2

Yes. Thanks, Suraj. So I think this might be helpful. So first, it's not outsourced. So the training that is done in an old model, if you will, prior, it was our sales reps that did both the selling type of work as well as they did the in home demos for patients.

Speaker 2

And so if you think about that's that's a non it's a patient engagement plus they were dealing with physicians and these other things. And so the development of a new workforce called PECS or patient education consultants was developed. But these are our employees. And so the patient education consultants are going out and their skill set is in education with patients. And so they're going out and doing the in home patient demos directly with the patients, which alleviates the sales reps from doing, if you will, kind of non selling activity.

Speaker 2

So I want to be really clear. These are our employees. They are trained, they are tactile employees. And so we had a goal in our sales rep productivity to change the mix of activities that the sales reps were doing and take those non selling activities off their plate and have these trained patient education consultants be the ones that were engaging with the patient. And so our goal by the end of this year is to have 50% of those in home patient in home demos done by our patient hour, patient education consultants.

Speaker 2

And so we're seeing that happen. We went from 30% last year to 35% in Q1 and then this quarter we had 45%. So our goal at the end of the year is to get to this 50%. Again, our employees, patient education consultants doing the in home patient demos, which can help the reps have more productivity in selling activities. I hope that's been helpful.

Speaker 6

Thank you.

Operator

Thank you. There are no further questions at this time. This does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Tactile Systems Technology Q2 2024
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