Okay, good morning, and thank you for joining us for our 38th Annual ROTH Conference. My name is Kyle Bauser. I'm a Senior Research Analyst at ROTH, covering the medical device sector. Today we have Electromed, the CEO, Jim Cunniff, and CFO, Brad Nagel.
Thank you both for joining. We're just gonna walk through the story. For anyone that's new to the story, Jim, maybe you can briefly walk through the history of the company and how it came to be a publicly traded company as ELMD.
Yeah, no, I'd love to, and thanks for having us here. We're excited to be here and share the Electromed story. You know, we're a pretty interesting medical device company in that we're really focused on airway clearance in the respiratory care pulmonary space. We're based in Minnesota, so Kyle, your stomping grounds.
Me too.
We're about an hour south of the Twin Cities. We've actually been around for quite some time, so next year is gonna be our 35th anniversary. I think for a lot of the companies that are at this conference that are relatively new, we're actually a little long in the tooth. We became a publicly traded company in 2010.
I think the genesis of that, Kyle, is, I think that the people running the business at that point in time wanted to infuse some capital into the business. We were obviously a much smaller company at that point in time and were hoping to actually have some people actually benefit financially from it. I think we probably went public at a stage within our trajectory that was probably too soon.
We're roughly about a $70 million company, so that's, you know, 16 years later from when we went public. We're generating about $12 million in operating income. We're not only growing, but we're also doing so profitably. We're generating cash, and we have no debt, which I think makes us quite unique in this space.
In the small cap space, definitely. Can you talk a little bit about the SmartVest technology and why it's important for bronchiectasis patients?
Yeah, no, I'd love to. In fact, before I do that, let me, if it makes sense, Kyle, why don't I talk about the disease state real quick?
Please. That was the next question.
Oh, that's perfect.
Let's do that first.
Yeah. Why don't we do that, especially for folks who are tuning in here. This is a really unique challenge that some patients have. It's really a chronic irreversible condition, and I think that's really important 'cause as you take a look at the evolution of what's happened in this market space in particular, it's been an underserved product or diagnosis as well.
Basically what these patients have is they have a repeated episodes of infection that impact their lungs. Unlike a lot of things that happen in the human body, actually, instead of having a constriction, this is actually an inflammation of your airways. The consequence of that is that mucus builds up in the airways that these patients have.
This is chronic, it's irreversible, so once you have been diagnosed with bronchiectasis, it's not going away. If you have mucus building up in your airways, as you can imagine, it, you have a hard time breathing. Really what we do is we help actually clear the lungs. Our device, the SmartVest, which I'll click to here, we'll get that to the slide. Essentially what we do is we clear the airways.
Our product provides 360 degrees of therapeutic support to the patients. We have a generator that's attached to a hose that's then attached to a vest. That vest then basically gently squeezes and releases the patient's torso that then focuses and moves the mucus into the major airways so that the patient can then cough it up or swallow it.
What we do is we're not curing this. We're basically improving the patient's quality of life. That's the first thing you wanna do if you have a bronchiectasis patient. We're kind of the first line of offense for them. Many of these patients, as you can imagine, if they have mucus that's built up in their airways, they could also have an infection, so those are treated by antibiotics.
In August of last calendar year, Insmed introduced a new drug, which I know you're familiar with, which is BRINSUPRI, and that's really to address the third pillar of what we call the vicious vortex, which is this kind of merry-go-round that these patients get on where they have, you know, inflammation, then they have mucus build-up, then they have an infection.
They get their airways cleared, they get their infection treated, and that's how they have bronchiectasis. What the new drug does, it really treats the third component, which is inflammation. It's not gonna improve the patient's quality of life. It's gonna basically help them maintain their baseline of inflammation within their airways.
Appreciate that. How does this SmartVest compare with other technologies in the HFCWO space?
Yeah. This is a depiction of our product in the space, and the one thing I didn't talk about on the previous question is that because this is chronic and it's irreversible, these patients are gonna be using this technology typically twice a day with 30-minute treatments forever.
It's something that really if they want to improve their quality of life and have free airways where they can get around and go to the movie theater, spend time with their grandkids, et cetera, this, we enable that.
How we differentiate ourselves in this slide, which we have here, is really multiple ways. One of which is we have just an outstanding industrial design on our product. This is a product that's used in the patient's home. You wanna have something that looks decent.
Most of our patients are over 65 years of age and don't wanna have a complicated device, so there's a touch screen, and there's really very few settings that they need to put on this device. In fact, when we actually do the initial setup for the patient in their home, we have a respiratory therapist with them that will actually set that up. So all they have to do is kinda tap the button to turn it on.
We have one of the newest devices, and because many of our patients are older, many of them are actually frail. You wanna have a product that's really comfortable. So we have a vest. We have the lightest weight vest in the market. We actually have Velcro enclosures. Many of our competitors have clips, kinda like what you would see on a life preserver.
Mm-hmm.
If you have arthritis, those are many times difficult to manipulate. Velcro is very easy to manipulate, very lightweight, so it's comfortable. It's kinda like wearing my sport coat that I have on right now. We're also unique, Kyle, in that we have a single hose design. When you take a look at two of our competitors, Baxter as well as Philips, they have two hoses, and so you wanna have something that's comfortable, ergonomic.
You've got two hoses, you can imagine it's a little clumsy. We have a single hose. That's also something that's patented for us, which kind of differentiates the technology. We feel like because we're a single product company and really focused on this space, we keep the patients on the technology longer than our competitors.
The last thing I would say about our technology versus our competition is that we have a lifetime warranty. A fter the patient fulfills their obligation with their copay, and we've gone through the insurance cycle they get to keep the technology, they're gonna use this forever, and they don't have to worry about any other additional out-of-pocket expense, which is key.
Mm-hmm
'Cause many of these patients are on fixed incomes.
This latest generation version is relatively new, and you touched on this. Are the other competitors working on next gen versions or are those that are out there kind of older generation?
Well, I've been in the medical device industry. I just ran into a former colleague, and he goes, "Well, Brad was asking how long have you known Sean?" I said, "Well, I think around 30 years." Brad goes, "No, I think it's more..." This friend of mine said, "I think it's more like 40 years.
Mm.
I've been in this space a long time, and as you know many times the life cycle of these products is usually a couple of years. That's really not the case with our product portfolio.
Yeah.
We introduced the Clearway back in late 2022, and we have one of the newest devices on the market. Hillrom came out with a product about a year ago, and so one of the things that they adopted was the Velcro closure, so they now have that. They had clips before. I think that's, I would say that we're the two newest technologies on the market. Some of our competitors have spoken about introducing new technology, but it just hasn't come out yet.
Mm-hmm.
We feel like we've had, excuse me, such great adoption and market reaction to the product. We're in a really good spot.
Yep. Got it. Jim, you talked about the drug that was introduced in the market, BRINSUPRI, in August that treats the inflammation component. How has that impacted Electromed's business?
Oh, we think it's been a tailwind. We really have. I know, Kyle, you had a kind of a fireside chat with a key opinion leader.
Mm-hmm
Pulmonologist probably about a month and a half ago, a month ago.
Correct. Yeah.
With another analyst who was actually covering Insmed.
Yes.
I thought that was really insightful. I would say the punchline, at least as a casual observer to that discussion, was the fact that what the KOL had indicated is a SmartVest, that's an everyday use product. I f you wanna clear your airways and you want to improve your quality of life, you really need to clear your lungs.
The drug doesn't do that. What the drug does is it helps really maintain that inflammation baseline so that hopefully that patient doesn't have future exacerbations that get them into a hospital or have them visit an emergency department.
We want these patients treated in the home. But to Insmed's credit, you know, before they launched the product, they invested quite a bit of money in patient education, quite a bit of money in provider education. We feel like those are just great tailwinds. P art of the challenge in this market, and I'm gonna go back to one of the slides that we showed earlier.
I know this is a very busy slide, but, you know, in our iceberg slide, you know, today, there's basically only 150,000 patients that are actually on our technology or one of our competitors. You look on this slide, it says HFCWO, that stands for high-frequency chest wall oscillation.
That's the mechanism of action for our product and our competitors. But there's actually about 925,000 patients who have actually been diagnosed with bronchiectasis. When you strip out the 150,000 who are on our technology and one of our competitors, that leaves about 800,000 patients that have bronchiectasis. It's been diagnosed.
They're not getting treated properly. About 35% of them are actually seeing a pulmonologist. About 300,000 patients are kind of within our sweet spot 'cause our sales reps calling pulmonologists to generate revenue. Our ASP is about $10,500 per device. That's a $3 billion market opportunity.
We feel like with the market development work that we've done, coupled with Insmed now coming into this market and complementing what we're doing, you know, in addition to our strong direct to consumer outreach that we do, and having respiratory therapists on staff that can answer patient questions and direct them to a pulmonologist to help treat them, we think it's a one-two punch that's really beneficial. We believe that this is a growing market, and we're feeling we're gonna get future penetration.
It sounds like you'll be able to at least through increased awareness be able to utilize HFCWO within the already diagnosed bronchiectasis patient population, but also with the added awareness, maybe the iceberg equation increases as well.
We would love it. Yeah. I mean, if you look below the waterline on this iceberg slide, there's still, you know, 4.1 million patients that are out there that have bronchiectasis, and it's typically a function of having basically overlap with COPD.
Yeah.
About 54% of COPD patients have bronchiectasis. They just have not been diagnosed, and that's about 4.1 million patients. It's just a huge market opportunity.
Got it. I appreciate that. That was my next question, is the addressable market. And to this point, how many providers treat bronchiectasis, and how many prescribers does Electromed have to the extent you can share?
Yeah, we really don't go into those kind of details. There's about 9,000 pulmonologists across the country. We're not calling on all of them. You know, as you do know, Kyle, you know, our PEG rate for our sales reps, you know, it ebbs and flows. You know, you have people retire, leave the organization, but you know, for this fiscal year in particular, we'd like to have 61 sales reps, you know, calling on pulmonologists across the country.
You know, we when we target pulmonologists to call on, we look at what their decile rating is. Really what that is, it's a rating of the frequency by which they prescribe this technology. We look at, you know, high prescribing pulmonologists. That's really, you know, those are the people who understand the disease state. They're prescribing for the technology.
One of the pivots we're making though this fiscal year, especially as we upgraded our CRM system, and we've invested in some market intelligence information, is actually starting to target some of the pulmonologists who are high diagnosing physicians, but low prescribing HFCWO providers.
We feel like, you know, as we continue to add sales reps and the question becomes, you know, do they have enough to be able to be successful and make money as we expand sales reps and shrink territories? We feel, you know, based on the iceberg, there's tons of opportunity coupled with the fact we're gonna start to really target some people who heretofore they diagnose a lot of bronchiectasis patients, but they're really not prescribing the technology.
What do you attribute that to? Just lower awareness amongst the, you know, the prescribers around bronchiectasis? Is it, you know, it's pretty undertreated?
Yeah.
What do you think the barriers are there?
Well, I think some of it is. Well, if you're diagnosing the patients, that's one thing.
Mm-hmm.
As you're well aware, you know, there's really and this is I think a moat and actually a great thing with our technology. If you have bronchiectasis and you wanna get reimbursement from Medicare or from commercial payers, it's a very prescriptive what needs to happen.
Yeah.
You know, the patient has to have had a CT scan, which basically verifies that they have bronchiectasis. They have to have tried and failed something else, that can even be manual chest percussion. They have to have had a productive cough for six months.
And as long as they, you know, ring the bell on those three things, then Medicare, as well as all the commercial payers, will reimburse for the technology. Sometimes what happens is, the physician has diagnosed the patient, but then they prescribe a lesser effective technology so that they try and fail something.
Mm-hmm.
Unfortunately, because of that, many of these patients, it takes longer to get on the technology versus sooner. We believe that's also a big opportunity because I think if you let this go too long, the patient's health declines considerably.
In fact, we actually did a retrospective study at about 6,000 patients, and what we looked at is of that 6,000 patients, there was about 58% of them that actually met all of the reimbursement criteria for HFCWO, but they weren't prescribed the technology. We feel like that's another opportunity for us.
Definitely.
Yeah.
How about IP? Is there IP around the SmartVest technology?
Yeah, there is, and we've got some provisional patents that are out there as well. I talked before about the single-hose design. I think that's one of the key elements of our IP portfolio. There's some things that we have relative to the hospital market with the pedestal and the generator that we have.
I think the key element for us is, you know, our sales team, the care that they give to our customers. In fact, you know, one of the things I think is really differentiates us is, you know, we are not only a manufacturer, but we also have all the capabilities of a durable medical equipment distributor. What that means is we have all the provider or payer contracts.
We have about 86% of the covered lives in the United States that have insurance. You know, we deliver the product to the patients and do the training. I think one of the other things that's really unique about Electromed is we provide back to the provider a SmartNote.
You know, essentially what we do, Kyle, is at the time that we deliver the product to the patient, we do a baseline assessment with some criteria, you know, objective criteria as to where they're at. We go back five days later, we do another assessment. We document that, and then we go back 30 days later and do a final documentation, which we provide back in a patient progress report called SmartNote.
What's nice about that is many times when a physician prescribes a technology or a drug, et cetera, they have no idea is it actually helping the patient. We help basically fill that void so that they can see that the patient's benefiting.
This is also a catalyst for our sales reps to go back to these physicians and go, "You know, patient Brad came in here. You got them on our technology. You can see they're benefiting. Do you have any other Brads or Jims that are Kyles that are out there?
Mm-hmm
that could benefit from this? You know, it's a complimentary way for them to go, "Yeah, actually I do, and I could see how my patients would benefit.
Sure. You talked a little bit about the reimbursement level around $10,500. How does that vary across payer types?
Well, I think the way I would more describe it is the duration of payment.
Okay.
Medicare, you know, most of our payers are 10 to 15 months, or excuse me, 13 months, Medicare being the longest at 13 months. You typically get the higher reimbursement rates earlier when the technology is actually getting reimbursed, and then it trails off the longer they're on the technology.
On average, that includes, you know, even returns, et cetera, we're at $10,500. Medicare is really the gold standard on the reimbursement side. They're at the high end. The one thing that does impact how much money and revenue we actually generate is how long you keep the patient on the product, and that's the other thing that differentiates Electromed.
Because we're a single product company, because we have what I think is a best-in-class high touch model with our patients and our providers, we keep our patients on the product longer, and that's really important as it relates to how much revenue you get. If you're keeping a patient on for two months, you're only getting a slice of what that actual $10,500 are versus keeping the patient on for 10 months.
Yep. That's a good point. You talked about the commercial organization, so the goal of 61 reps. How do you think about layering in distributors? How do you think about the international opportunity, et cetera?
Yeah, it's a great question. We feel like the domestic market is a great market. Really, as I look out into the future, Kyle, I feel like there's tons of runway. We talked about the iceberg and the untapped opportunity there. We're gonna continue to add sales reps.
When I take a look at the international market, it's a nascent market. It's not as developed as the United States. We really, quite candidly, have a presence there, but it's all through distributors today, and it's only about 1% of our total revenue. We feel like that's gonna be flattish.
I think also, as you're probably aware, there's some regulatory changes that are happening in Europe, in the EU, that are pretty onerous relative to, you know, actually registering your product within those markets, and the juice just isn't worth the squeeze. International, interesting. You know, we're gonna continue to support the distributors that we have in that market.
Closer to home, domestically, we actually go through a handful of distributors today. Obviously, most of our revenue is coming on a direct basis, and that's why, you know, our gross profit margins are in the 70s, not in the 40s. There is, you know, some strategic reasons why we have distributors. I talked before about our payer coverage. We've got outstanding payer coverage. Last year, we invested in resources to expand that.
You know, people who are actually out there as hunters to go and talk to payers who are not on contract with to get on contract with. In fact, in the first half of our fiscal year, we added 4 million new lives, which is great. We're expecting to continue to do that.
There are some markets where the payer mix is really fragmented. We're in California right now. This is a really fragmented market. It's really frustrating when we have a sales rep who goes, finds a patient who can benefit from our technology, we get a prescription, but we can't fill it because they're not within our network.
Mm-hmm.
We've contracted with a, you know, a distributor in this market as an example, to be able to kind of close the gap with some of those payers which were not on contract. We've done that in another market as well, and then we have a couple of other DMEs who are respiratory-focused, and they were looking for an alternative to one of our competitor's products.
Most of their sales team are respiratory therapists, and they just feel like, you know, we have a best-in-class product and they wanted to be able to provide their patients with, you know, best-in-class technology.
Sure. Yep. Makes sense. Maybe just briefly, can you touch on the hospital market too, and how that kinda compares with the home care?
Yeah, sure. We feel like that's a really neat gateway for us. It's about 5% of our total revenue today. In fact, let me maybe go to kind of the breakdown slide here. Yeah, if you take a look at this slide, about 5% of our revenue is really coming from the hospital marketplace today.
But as you can imagine, you know, if you're going into an emergency department or you're getting admitted into the hospital because you have bronchiectasis, it's a chronic, irreversible condition. You get treated, you get stabilized. You're using HFCWO in the hospital, you get discharged. If they're not, they don't have the product at home, you wanna get that product to them so that they can use it in the home.
Today and really in the future, the hospital market for us, it's a capital market, so it's different than the home market. The reimbursement landscape in the home is pretty well defined. The hospital market, it's a capital sale, so you know, you have to go through the capital approval process. You have to go through a committee. You have to have people trial the product, our competitor's product.
You have to make sure that you know, they take a look at the quality and the durability and all the other elements that you'd look at, and then there's obviously price comes into play. It's a great capital opportunity. This market's been growing, or our revenue's been growing for the last couple of years by 20% year-over-year, which has been great.
The real key is getting those patients who are getting discharged who don't have the technology at home on our product. We feel like there's a few centers that we wanna focus on in the coming fiscal year to really try out that algorithm and see if by having, you know, focused entities in the hospital, can we actually capture more of those discharge referrals?
Sure. Just lastly, I think we're almost out of time here. Balance sheet, kind of, capital allocation strategy. Brad, if you wanna jump in.
Yeah. One of the things about the profile that Jim described, where we are profitable, generating cash, have no debt, is that it generates cash.
Mm-hmm.
We like that because it keeps options open. We have a slide in here as well that kinda speaks to what that's looked like in the last year and expect it to have a fairly similar profile in the years to come, where we are still investing into the business organically and using cash to drive that growth. We have the option to look inorganically, but we haven't actively pursued that in the past and don't foresee that changing in the real near term.
With the excess, we are still beyond what we're investing into the business. We're still generating excess cash, and we don't wanna just accumulate a cash stockpile. We wanna give back to our shareholders, and we've done that through share repurchases.
We did $10 million worth of share repurchasing in our last fiscal year, and at the beginning of this fiscal year, our board authorized another $10 million for this fiscal year. Excited to be able to share in that with our shareholders.
Excellent. No, it's pretty unique for a small cap company to be so profitable. Thank you. I think we've run out of time. I appreciate your time and for walking through the story.
Hey, real pleasure. Thank you.
Thanks as always, Kyle.
Of course.