Good evening ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2020 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.

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 in the Risk Factors section of our Annual Report on Form 10-K filed today with the Securities and Exchange Commission..

Thank you, operator. Good evening, and welcome everyone, to our fourth quarter and full-year 2020 earnings call. I'm joined on the call today by our Chief Financial Officer, Brent Moen. Let me provide you with a brief outline of today's call.

I'll begin with a recap of revenue results for the fourth quarter and a review of our recent operational performance, including an update on the impacts that we saw during the quarter from COVID.

Brent will discuss our quarterly and annual financial results in detail and review our financial guidance for 2021, which we provided in our earnings release this afternoon. I'll then share a few closing thoughts on our outlook for 2021 before we open the call for questions. And with that, let’s get started with the review of the fourth quarter.

In spite of the business disruption that we saw due to COVID, we were pleased to return to year-over-year growth this quarter, and ultimately exceed the high-end of our annual revenue guidance range. For the fourth quarter of 2020, we grew total revenue by 4% year-over-year to 59.2 million, a new quarterly record.

The increase in total revenue was driven by strong sales and rentals of our Entre systems, which increased 44% year-over-year, while sales and rentals of our Flexitouch Plus systems were essentially flat. Relative to the third quarter of 2020, we saw a 20% sequential improvement in total revenue.

Performance, which we believe is especially notable given the incremental headwinds we experienced in Q4 as a result of COVID.

Looking at our business trends more closely, throughout the fourth quarter, we continue to see the impact of COVID in the form of constraints related to health and safety protocols adopted by the healthcare facilities that we serve.

A survey of our top accounts conducted in early January found that only a quarter of the approximately 1,400 accounts surveyed were operating without restrictions consistent with the results of our October survey..

Thanks, Dan. Total revenue in the fourth quarter increased 4% on both a reported and operational basis to $59.2 million, compared to $57.1 million in the fourth quarter of 2019. Sales and rentals of our Flexitouch systems accounted for 87% of our total revenue in the fourth quarter of 2020, compared to 90% in the prior year period..

Thanks, Brent. Before we open the call for questions, I wanted to provide some added color and key assumptions for the investment community to bear in mind as they evaluate our 2021 revenue guidance.

First, while we expect first quarter revenue to be down mid-single-digits year-over-year, as Brent outlined earlier, our full-year 2021 guidance still assumes revenue growth in the mid-to-high teens over the first half of 2021, and high-teens in approaching 20% over the second half of 2021.

Second, while we continue to invest in an expanded commercial team, we're adding to our service and support team as well, which we believe will enhance the productivity of our direct sales reps, particularly our product specialists, while also driving leverage in our sales and marketing line going forward.

Let me take a minute to provide you with some additional color on these important changes to our commercial organization. By way of background, we ended 2020 with a team of direct sales reps that consisted of approximately 225 product specialists and associate product specialist with roughly an even split between the two roles.

This team of direct sales reps is led by approximately 30 sales managers including regional and district managers and VA specialists, which in total brings us to the 255 feet on the street that we reported in our 10-K filing today. As we exited 2019, we began trialing a new position in our organization called field support specialists.

These individuals assist our direct sales reps by conducting patient demos and collecting necessary medical records and documentation in order to free up more of our direct sales reps' time so they can focus on engaging with clinicians and growing their prescriber base.

We expanded this pilot field support specialist team during 2020, and we've been pleased with the success of the initiative overall. We ended 2020 with a team of approximately 30 field support specialists, bringing our collective field commercial team to 285 employees at year end.

In 2021, we expect the total number of our team of direct reps and field support specialists to increase in the high-teens year-over-year. We also expect the composition or mix of the team to change over the course of the year as a result of two components.

First, we expect to promote approximately 30 of our existing associate product specialists to product specialists and expand our number of sales territories. We also expect the size of our team of product specialists and associate product specialists to remain relatively flat from the approximately 225 at year-end of 2020.

However, we expect the mix of this team to shift from 50-50 to more like 60-40 in favor of product specialists by the end of 2021. Second, we expect to invest in the expansion of our field support specialists team by adding approximately 45 support specialists this year.

Importantly, this investment will significantly enhance our direct rep productivity at the equivalent cost of approximately 20 new specialists.

We view the investment in the expansion of this team represents a P&L-friendly approach to improving the productivity of our existing reps, while continuing to deliver high-quality service to our customers and achieving our growth goals.

Stepping back, despite the continuation of COVID-related headwinds as we enter 2021, our organization and the clinicians and customers we serve have become increasingly more resilient and resourceful after navigating an unprecedented year.

For Tactile specifically, we believe many of the changes we made in 2020 will ultimately improve our business and process going forward with an enhanced sales and field support team in place to improve our coverage and rep productivity, an expanded pool of prescribers and an updated approach for educating clinicians and training patients.

We're excited about our prospects in 2021 and beyond. We also continue to believe our market is vastly underpenetrated and that we have ample opportunity to drive strong sustained growth over the long-term as we continue our market development efforts, especially as vaccines give way to some return to normalcy.

In December of 2020, we conducted another analysis of U.S. medical claims data, which showed that there were 1.4 million patients diagnosed with lymphedema in the 12-month period ending December 31, 2020.

While the number of patients diagnosed in 2020 was undoubtedly muted by COVID, the data still reflects growth in the number of patients diagnosed during the year, despite the significant challenges related to COVID.

The 1.4 million diagnosed in 2020 also shows the number of patients diagnosed has increased at a compound annual rate of more than 10% since 2013, the first year we evaluated claims data. With approximately 60,000 patients served over the course of 2020, we remain severely underpenetrated in a large and growing market.

This year we're focused on expanding our leadership position in the $5 billion U.S.

lymphedema market through a combination of continued execution and strategic investment in our business, including driving improved productivity in our sales organization while continuing to expand our commercial teams, targeting and educating new clinicians to grow our prescriber base while increasing our penetration of existing accounts, and continuing to leverage important tailwinds including our broad in-network coverage with commercial payers.

Longer-term, we also continue to develop and expand the size of our addressable market opportunity by investing in essential areas, including clinical evidence generation, clinical education and research and development to raise awareness of lymphedema and enhance our product offering to expand our patient-focused solutions and market leadership position.

By focusing on these areas, we aim to return to strong sustained growth and improved profitability as quickly as possible and continue our long-term track record of performance for the benefit of our patients, customers, and shareholders.

I'd like to conclude my remarks today by commending the entire Tactile Medical team for the exceptional effort and dedication they've shown during a challenging year. Their commitment to serving our customers and improving the lives of patients is one of the most distinguishing features of our company and the essential component of our success.

And lastly and most importantly, I'm proud of the initiatives we've implemented over the last year to mitigate the potential risks created by COVID and continue to ensure the safety of our employees, as well as the clinicians and patients that we serve. Operator, we'll now open the call for questions..

Thank you. And our first question will come from Matt O'Brien of Piper Sandler. Please.

Hi, guys. This is Drew on for Matt. Thanks for taking the questions and congrats on a good quarter considering the circumstances. I do want to start off on guidance. Maybe you guys could help us understand a few things. Historically, Tactile talked about yourselves as a 20% plus grower.

The guidance you've thrown out there today is a little bit light of that and I think we all understand that COVID is going to have some impact in the first part of the year.

So, I guess first, what are you seeing on the street as far Q1 that kind of led you to guide to the slowdown here in Q1? And then second, is there anything else meaningful outside of COVID that's contemplated into that 15% to 20% that we need to be mindful of? And when do you see growth really returning to that normalized 20% base?.

Yes, thanks for the questions, Drew. So, I think first of all as it relates to the first quarter, while we're not going to give monthly breakdowns, I can certainly indicate that we continue to see the headwinds of COVID. We've historically depended more on the VA business as a bigger contributor in the first quarter.

And given kind of where the VA softness has been, I think ultimately that's a contributor, and overall kind of the holiday COVID winds that we entered the quarter with I think, will all contribute a little bit to, to how we see the first quarter playing out.

I think that while we certainly are looking forward and fully expect a return to that 20% sustainable top-line growth, keep in mind, given the guidance on Q1 much of the growth that we're talking about is going to have to be condensed in three quarters. So, the 15% to 20% reflects the full-year.

Most of that will have to be produced in the three quarters following, and we see a lot of the assumptions that we've kind of built into this is that there is really not going to be a material change in the operating environment in the first quarter and probably even moderated certainly in the first half.

The throughput issues we've talked about, patient access, etcetera. I think until we see vaccine traction take hold, I think some of those same headwinds will probably persist. Not knowing some of the variants, etcetera.

I think, that we certainly expect that we're going to be in a much more normalized environment in the back half, but that's kind of what we're looking forward to as far as how we think we can finish up and roll into the new year..

Okay, that's helpful. I do want to follow up a little bit on your comments on the VA there.

Recently, you guys had suggested it likely becomes a smaller portion of business going forward, but maybe you could kind of give us an idea of how it trends over the intermediate term? I mean, does it stabilize a bit in later 2021 as you begin to comp against some of those COVID-related issues.

And then just wondering if you received any indication from VA of when they intend to bring some of those patients back in to more concentrated centers in a post-COVID world? Thank you..

Yeah, so we've not gotten any evidence that the VA is poised to return to their pre-COVID posture. So, we're continuing with the assumption that the current landscape will continue to persist for some period of time.

I think – Brent, I don't know if you have anything you want to share on the mix, I mean other than – I guess the other one I would just add too, Drew, is that keep in mind the VA ultimately represents less than 10% of the total healthcare spend. So, anything above kind of low-double digits probably represents an overweighting.

So, we were at 11% in Q4. I think that on a – if you take out kind of the lumpiness of the quarters within the VA being in the low-double digits is probably a sustainable target for us..

Got it. Thank you..

Our next question will come from Margaret Kaczor of William Blair. Please state your question..

Hey guys, good afternoon.

Yeah, I wanted to follow up on some of the sales rep updates that you gave, and maybe just to start, could you walk us through what led to those changes in sales of structures? And how we should think about sales rep productivity it may be ramping going through this year and into 2022? And then ultimately all of this leads into this question and I'll say it upfront, if you have a high-teens increase in reps this year that implies at least high-teens growth for 2022 unless productivity declines, but as you're leaning more into these senior specialists with arguably higher photos that should lead 2022 growth to 20%-plus.

So, net-net, is that the right way of thinking about it?.

Yeah, let me take a shot at it, and then Brent may have something he wants to add, Margaret. But when we – I actually inherited this pilot program with field support reps when I got here.

And it was an interesting one because when you think about the amount of tasks associated in the field that have to occur, many of them are not or they are outside the boundaries of market development and engaging with physicians. You've heard us talk a bit about the importance of access to patients to do demos, so the patient can get engaged.

Many times that occurs in a doctor's clinic, and often it requires the rep to occupy a clinic room for the better part of an afternoon and they may get three patients, they may get one, they may get five. But the point is, it certainly isn't something that warrants a highly trained professional market development rep.

So, the idea was that instead of the time that these professional reps were spending doing patient demos and perhaps even more to the point, collecting medical records when they were necessary to make sure that we could submit on the patients' behalf, those are big distractions from the opportunity to go engage with new prescribers.

So where we had deployed on this pilot program, some of these field support reps, we were able to demonstrate that the productivity of those reps that had field support reps in their geography saw higher productivity and make good sense to us.

So, we started to contemplate should we continue to just add reps knowing that a portion of their day will continue to be consumed with, what I would call non-selling tasks or should we continue to equip those higher productivity markets with support reps. So, we can liberate the sales force and allow them to expand their productivity.

And that's kind of what we're talking about for 2021. So we're still looking at an increase of 14% or 15% in total headcount in the field.

The mix, as we said, will look a little bit different, but making sure that we can liberate some of our best salespeople to spend more of their time hunting is – and liberated from the service test is really what the model is about..

And Margaret, I would just add – this is Brent by the way. Hello. I would just add that, I mean, as we look through this we – and we pressure-tested relative to our 2021 as Dan had mentioned in his comments, wrapping up the call. Certainly, we believe this to be a P&L-friendly approach to improving that productivity.

So you think about that lower-cost resource being able to offset the continual add of product specialists or an APS over the course of time. So, definitely expect that you will see productivity bump, as well as a bit of friendly behavior on the P&L..

Okay, useful. And as a follow up, I am going to hit on both 2022, as well as potential risks, I guess it’s – these changes in the sales rep model. I don't really see one, but I've always got to ask that question because I think the management team sometimes gets surprised when you do change sometimes that sales structure.

What have you guys thought about and how does that look like, what's the risk profile? And then the second question is, going back to the 2022 comment, I know you're not ready to provide guidance.

I'm going to push anyways on it, is that year-end growth number that you guys are planning to finish this year at, which I think you guys said, kind of high-teens maybe approaching 20%, is that the right rate that we should start to focus on as we go into 2022 or is it just kind of an easier comp off of this past Q4 and so maybe not apples-to-apples? Thanks, guys..

So, two things. First of all, relative to the question about risk, in some of the models pivot's we're talking about. I think that if we did this impetuously certainly, we'd probably be confronted with more risk.

The fact that we've actually let this pilot run its course over the last 12 months or so has given us a lot more confidence that it makes good sense.

And interestingly, the sales force, which is usually the most important one to make sure that you have on board, are the ones that are actually raising their hand saying, hey, we really want to have an FSS.

They've talked to their peers and they've recognized that their peers that have the support of a field support rep has allowed their peers to actually spend more time selling and they've seen evidence in their results. So, this seems to be a pretty popular choice with the sales force.

And I think that as a result, we feel like there is a better chance that it will be warmly embraced. Certainly from a P&L standpoint, it seems to make sense.

And I think any of us think about division of labor, it's the same reason I have an assistant in the office because she's probably better suited to do some of the things I'm not as well equipped for and those are some of the same, I think analogies.

From a 2021 to 2022 standpoint, we felt like we are being good and bold by giving good clarity on 2021. That said, we continue to believe in and expect of ourselves to be growth profile over the long-term.

We're certainly not prepared to give 2022 guidance today but I think that getting back to 20% over the course of 2021 is something that's going to position us to be the kind of 20%-plus long-term growth profile company that we still aspire to be..

All right. Thank you, guys..

Our next question comes from Ryan Zimmerman of BTIG. Please state your question..

Hi. This is actually Carolyn on for Ryan. Thanks for taking my questions. I wonder if we may just turn to your expectations for your international initiatives. So, I know that you had, prior to the pandemic, expected renewed CE Mark for the Flexitouch product before the year-end of 2020.

And so just appreciating that side again pre-pandemic, could you provide an update on your expectations for those international initiatives in 2021 and going forward? Thank you..

Sure, and thanks for the question, Carolyn. From an international standpoint, since I joined, we've sort of relaxed the pace.

It's a little – might be a little surprising having the fact that I came from an international background for a period of time, but when you think about the growth profile that we still have ahead of us in the U.S., one of the things I've tried to be very focused on is keeping our attention very focused on the development within this U.S. market.

Given the size of the underserved community and the job ahead of us in market development, my concern would be that we spread ourselves too thin. I think the other one is, as we think about the international markets probably going to be at a lower ASP for us and probably a different channel than we've been able to build out here in the U.S.

So, I still believe that it's time will come, but we've slowed some of our investment. I think the CE Mark's probably pushed back a year and largely by design because we've tried to reorient most of our initiatives to continuing to develop the U.S. market..

Thank you. Yeah, absolutely. It makes sense. And then just thinking about maybe turning to some of your comments about new prescribers. So again, you had mentioned that you had added maybe 3 times as many attendees at some of those educational events in 2020 versus 2019.

And so, especially some of those 3x attendees potentially settle into a more regular prescription cadence, how are you thinking about the contribution from some of those new prescribers in 2021? Thank you..

Yeah. Thanks for the question. And new prescribers and expanding the prescriber base is an important part of our growth story. And I think that when you consider that we've seen from the surveys of our customers that many with the throughput constraints that we've spoken about quite a bit, have seen some of their throughput down by double digits.

Clearly, to grow 4% we're filling the gap somewhere and new prescribers have continued to play an important role. We've talked previously about new prescribers typically start out slow.

So often, a new prescriber that recognizes the potential merit of one of our products will prescribe for a patient or two, and in spite of the body of evidence, many still want to see how their patient responds. So, they may put one or two patients and follow them for a couple of months.

In fact, if they've got a patient that they want to put it on, they may have to do a try it and sale on a compression garment first so they may not even be eligible until they've gone through that.

But as they start to get experience typically, that's when we see them recognizing the success and us being able to share the feedback and then ultimately cultivating deeper into their patient population and recognizing more patients that can benefit.

As we've kind of laid out the year, certainly we expect more growth to continue to ramp over the course of the year and I think new prescribers and their continued expansion in utility with our products will play an important part of that..

Perfect. Thank you..

Our next question is from Suraj Kalia of Oppenheimer. Please state your question..

Good afternoon, Dan. Good afternoon, Brent.

Can you hear me all right?.

Yeah..

Perfect. Hey, Dan, forgive me I – so many calls going on at the same time, so I hopped in a few minutes late.

What was the extent of independent contractor usage in Q4?.

Suraj, I'd be happy to give you a little bit of color. It's Brent, by the way. So, we did actually reactivate a small number of independent contractors to help us meet the demand in the fourth quarter. The number that we actually used independent contractors for training was a pretty small portion of our overall training.

The only reason we brought them back is to make sure that we could satisfy the patient interest and want to get during the fourth quarter..

Got it.

Dan, Brent either one, the 60,000 patients you mentioned treated in FY 2020, how should I think about the utilization metrics on a per-center basis and with this introduction of field support specialists how – just give us some goalposts of how to think about curious where utilization was, curious how we are adding FSS, and this is what we could potentially look for over time?.

Yeah. I mean I think, Suraj, we don't provide a ton of metrics relative to facility break down in terms of where the prescribers or prescriptions are coming from.

But I think one of the interesting things to note is this as Dan pointed out in his prepared remarks and follow-up questions is that, we are seeing a nice step up in the number of prescribers and the interest level from folks that we have educated virtually.

So, we're excited about what that opportunity presents for 2021 and as Dan pointed out will be a significant contributor to our overall revenue growth..

Got it..

Yeah, I think – I would just add, Suraj, that we've got some product specialists that have – associated product specialists in the geography. We have some product specialists where there's a field support rep is doing a lot of the administrative burden.

And then in some markets, we have a product specialist with the support of neither, which would typically have to manage all of the tasks, including some of the non-selling things that we've talked about.

So, it's a little hard sometimes for us, I think to use a single number that's meaningful that says, here's the productivity for example per rep because each rep may be supported in a different way.

But I do think that sales expense as a percentage of revenue was a reasonable metric that I think we can all kind of anchor on to demonstrate that we're making progress..

Got it. And finally, maybe Brent, I would let you have this question and I will hop back in queue.

Maybe you'll referenced this already, the commercial segment did seem a little soft in the quarter, what are your expectations for Q1 in your – embedded in your guidance and is there any subliminal differential impact because of COVID on the commercial segment? Thank you for taking my questions..

No. Absolutely. Happy to provide a little bit of color on that. So, the commercial business in itself, yeah, was essentially for the fourth quarter flat and represented over 71% of our total revenue and that compared to 75% of our total revenue in the prior year.

As you might expect with Flexitouch being down and limited access to the VA and some of the hospital centers, a lot of the focus ended up being in the vascular space and drove lower extremity usage of which a higher percentage of that ended up being Medicare.

So, I think what you're referencing here, Suraj, is a continuation of the COVID impact that we've experienced and patients' just apprehension to return in terms of visits and also the patient throughput relative to the facilities that we've experienced. As it relates to the impact in Q1, we do face some seasonality in our business.

So, commercial is certainly one of those areas where it's impacted because patients get their co-pays reset at the beginning of the year. So certainly, look to continue to execute on our model in the first quarter, but that will be a challenge and that's part of the reason that we're guiding to mid-single-digit down in Q1, one of the contributors..

We are currently showing no remaining questions in the queue. That does conclude our conference for today. Thank you for your participation. .

All right. Thank you..

Thanks, operator..

Appreciate everyone..