Tactile Systems Technology, Inc. (NASDAQ:TCMD) Q3 2022 Earnings Conference Call November 7, 2022 5:00 PM ET
Company Participants
Dan Reuvers – President and Chief Executive Officer
Brent Moen – Chief Financial Officer
Conference Call Participants
Ryan Zimmerman – BTIG
Margaret Kaczor – William Blair
Suraj Kalia – Oppenheimer
Operator
Welcome, ladies and gentlemen to the Third Quarter of Fiscal Year 2022 Earnings Conference Call for Tactile Medical. [Operator Instructions] 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 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-K as well as our most recent 10-Q filing to be filed with the Securities and Exchange Commission. Such factors may be updated from time-to-time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.
And I would now like to turn the call over to Mr. Dan Reuvers, Tactile Medical’s President and Chief Executive Officer. Thank you, sir. Please go ahead.
Dan Reuvers
Thank you, operator and welcome everyone to our third quarter earnings call. I am joined on the line by Brent Moen, our Chief Financial Officer. I will begin our remarks today with a high level review of our third quarter financial performance, followed by a discussion of the factors that drove our third quarter results and an update on some of the recent operational progress we have made. Brent will then cover our quarterly financial results in greater detail and review our 2022 financial guidance, which we updated today in our earnings press release. And finally, I will provide some thoughts on our updated outlook and continued areas of focus for 2022 before we begin the Q&A session.
So, let’s get started with a review of our financial performance. We reported total revenue of $65.3 million for the third quarter, representing growth of 24% year-over-year. These results came in well above our expectation for third quarter growth of 13% to 17% year-over-year, which we discussed on our Q2 earnings call. Sales of our airway clearance products were the largest contributor to our stronger than anticipated revenue, contributing approximately 19 percentage points to our total revenue growth year-over-year. We are also pleased to see revenue from our lymphedema products increase 5% year-over-year, which modestly exceeded the 1% to 3% growth range we had anticipated. In addition to our strong sales performance, we delivered significant year-over-year improvements in our profitability, increasing our gross, operating and adjusted EBITDA margins compared to the prior year, while also maintaining our solid cash balance.
Turning to a discussion of the primary drivers that contributed to our lymphedema and airway clearance sales performance our lymphedema business benefited from a combination of several factors. At a clinic level, we saw modest improvement in patient volumes compared to the second quarter although pockets of clinics with staffing related challenges do remain. At a company level, we saw a high level of engagement from our lymphedema sales reps following our training initiatives in the first half of the year and the launch of our two new products in July. In particular, the launch of our new ComfortEase garment has been a nice innovation for our reps to feature as they walk – as they work to reengage targeted clinics and referral services.
Additionally, we are pleased to see stabilization emerging in our field sales team, exiting the third quarter fully staffed, a consequence of improving retention and engagement. And lastly at the clinician level, we were also pleased by the response we saw from both new and existing customers in the lymphedema channel following the launch of our new products. This was most notable in the vascular space where ComfortEase garments added a fresh message. In addition to the strong sales of our lymphedema products, we enjoyed another very impressive quarter with our airway clearance products, namely the AffloVest, generating slightly over $11 million in revenue. As a reminder, we acquired the airway clearance business and its product the AffloVest system on September 8 of last year and only booked about 3 weeks of sales in the third quarter of 2021. On a standalone basis, however, assuming it had remained a separate entity in both periods, our airway clearance product line achieved growth of 139% year-over-year in the third quarter of 2022. This performance reflects the ongoing adoption among the respiratory DME reps we have partnered with.
As I have described previously, these respiratory DME’s portfolios of complementary products, coupled with the existing clinicians that they serve, are leading them to both new and existing patients that are well qualified to benefit from airway clearance therapy via the AffloVest. The case for at-home treatment with AffloVest is a compelling one as these eligible patients are likely to require hospitalization, if left untreated, due to recurring pulmonary infections and pneumonias. And from an economic standpoint, AffloVest receives favorable reimbursement, making it a compelling product for our DME partners.
With this as a backdrop, we believe the strong demand we are seeing is largely driven by identifying eligible patients that need at-home airway clearance therapy within our channel partners existing customer base and referral networks. Importantly, we also believe our growth is benefiting from identifying patients that would have otherwise been left unidentified or untreated, if not for the efforts of these reps. We couldn’t be more pleased to be bringing AffloVest therapy to countless underserved patients, which is in keeping with Tactile’s mission to both reveal and treat those suffering from underserved chronic diseases in their homes.
During the third quarter, we also continued to see our existing DME partners expand the availability of AffloVest to additional branches within their networks, aided in part by our team of respiratory specialists. This represents another important driver of demand and one was significant runway as we continue to expand the number of reps, branches and DMEs bringing in AffloVest’s relief to more patients.
Lastly, from a supply side, we continue to make progress in expanding our AffloVest production capacity. We continue to work closely with our existing supplier. And we are also able to secure some initial inventory from our new second supplier to support demand, although their initial progress remains dependent on spot buys. While we expect some lumpiness through the rest of the year, we remain on track to be fully up and running with our second supplier by year end, which should position us to keep pace with the strong demand we expect going forward.
Stepping back, when we acquired our airway clearance business a year ago, it represented the largest acquisitions within Tactile to-date. It had generated just under $17 million in revenue over the prior 12-month period and remained in the initial phases of validating its strategy to leverage the DME channel. Given the progress we have achieved over the last year and as indicated by our updated guidance, the fact that we now expect to generate upwards of $36 million in airway clearance revenue this year, we are convinced we are pursuing the right strategy with the right asset to support our focus on delivering sustainable growth and improving profitability.
Shifting to review of our third quarter operational highlights, most notably in July, we began the full market release of our two latest solutions for our lymphedema patients, our ComfortEase garments, and our Kylee mobile application. It’s important to note that these represent the first new product introductions from Tactile Medical in over 3 years and reflect our multiyear effort to enhance our focus on R&D and new product development.
Let me update you on our recent progress with respect to each of these solutions. As a reminder, our ComfortEase garments are designed to be used with our Flexitouch system on the lower extremities. Our primary goal in designing this latest generation of Flexitouch garments was to enhance the overall user experience for our patients by improving ease of use, comfort and fit, while insisting on preserving and delivering our clinically proven results.
With this goal in mind, our ComfortEase garments were developed to be more intuitive to put on and take off, much like any other article of clothing and were created out of lighter, cooler and more malleable materials to improve patient comfort. Many patients with lymphedema in the lower extremities have limited mobility, so our ComfortEase garments are designed to help them overcome these issues within their daily management of their lymphedema at home. These improvements were also intended to make it easier to train patients, promote strong patient adherence and ultimately facilitate optimal treatment outcomes. Following the full market release, we have received excellent feedback from our sales reps, trainers, clinicians, and most importantly, our patients. Our reps are excited to have a new product to facilitate conversations with existing and potential new clinician prescribers.
And as I mentioned earlier, we are pleased with the level of customer engagement they are seeing. And our patient trainers have broadly shared that patients are finding our ComfortEase garments more intuitive and easier to use. Importantly, they are seeing that patients with limited mobility are able to put on and take off ComfortEase garments more easily. We have also been pleased with the feedback received following the launch of our Kylee mobile application for both the iOS and Android platforms. This app is intended to expand our support for lymphedema patients that are earlier in their journey towards obtaining a definitive diagnosis and effective treatment.
Our analysis has shown that it takes an average of 3 years for the average lymphedema patient to obtain a definitive diagnosis following the onset of symptoms and engagement with three or more healthcare providers along their journey. This underscores the lack of awareness and understanding that exists among healthcare practitioners when it comes to lymphedema, which is unsurprising given the little attention the lymphatic system receives in medical training, even among most specialty programs. With Kylee, patients can easily learn more about lymphedema and their treatment options and then use the app to document their disease progression.
In doing so, we believe they will be able to arrive at the doctor’s office better informed, ultimately shortening the eligibility time it takes to obtain one of our entree or Flexitouch Plus systems. Once a patient receives an entree or Flexitouch, they can also use the product tutorial videos and FAQ is available on our Kylee app to complete their training easily and effectively or use it as a source of support. Following its launch, we focused on introducing the Kylee app to our clinician prescribers and making it available to patients in their doctor’s offices, through our in-clinic patient demos and via social media platforms.
While still early, we have seen some patients initiating therapy immediately upon receipt of their device, finding the video vignettes easy to understand and responding with satisfaction scores equally high to those with an in-home training experience. In time, Kylee is expected to grow in its utility, including as a path to exchange documents and process orders more efficiently, but also in ways for us to continue our ongoing patient engagement. Key is to delivering high patient satisfaction scores while reducing our overall cost to serve.
In addition to promoting the use of our Kylee mobile app, we are continuing to raise awareness for lymphedema and its effective treatment within the medical community through virtual and in-person clinician education events. In the third quarter, we hosted a total of 45 educational programs that were attended by approximately 1,500 U.S. clinician participants. Year-to-date, we have hosted over 160 educational programs and trained nearly 4,900 participants, both in-person and virtually. We plan to continue hosting educational events focused on cancer-related lymphedema, including survivorship and proper management of cancer-related lymphedema. All-in-all, we were excited to complement our stronger than expected financial performance with continued operational progress during the third quarter.
Brent will now review our third quarter financial results in more detail, along with our updated financial guidance. Brent?
Brent Moen
Thanks, Dan. Total revenue in the third quarter increased 24% year-over-year to $65.3 million compared to $52.5 million in the third quarter of 2021. Looking at our total revenue by product line, sales of our airway clearance products, which includes the AffloVest product line we acquired on September 8 of 2021 increased $10.2 million year-over-year to $11 million. And sales and rentals of our lymphedema products, which includes our Flexitouch Plus and entree systems increased $2.6 million, or 5% year-over-year to $54.2 million.
Total revenue by channel was comprised of $36.2 million from sales to commercial payers, $11.3 million from Medicare, $11 million from durable medical equipment distributors, and $6.8 million from the VA. As a reminder, durable medical equipment distributors, is comprised of revenue from our acquisition of the Airway Clearance Therapy business. These figures compared to our total revenue by channel in the third quarter of 2021, in which commercial, Medicare, DME distributors and the VA represented approximately $36 million, $8.9 million, $861,000, and $6.7 million, respectively.
Continuing down the P&L, unless noted, all references to third quarter results are on a year-over-year basis. Gross margin was 71.7% of revenue compared to 70.4% last year. Non-GAAP gross margin increased nearly 40 basis points year-over-year to 72.2% compared to 71.8% in the prior year. The increase in non-GAAP gross margin was attributable to both product and payer mix. Non-GAAP gross margin excludes non-cash intangible amortization in both periods. Non-GAAP gross margin in the third quarter of 2021 also excludes inventory write-offs and non-cash purchase price adjustments related to the acquisition of the AffloVest in this period. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release.
Third quarter operating expenses, were $48.4 million, an increase of $10.1 million or 26%. The increase in operating expenses year-over-year was primarily driven by a $4.4 million increase in sales and marketing expenses largely due to the addition of our AffloVest sales team and new hires added to our lymphedema sales team, along with increased travel and related expenses as we return to normalized business activities. The year-over-year increase in operating expenses was also driven by a $3.8 million increase in non-cash intangible asset amortization and a non-cash earn-out expense related to the acquisition of the airway clearance therapy business, an increase of $1.8 million in reimbursement, general and administrative expenses, and a $172,000 increase in research and development expenses.
Excluding the aforementioned non-cash expenses, along with litigation, defense and executive transition costs in both periods our non-GAAP operating expenses increased 18% year-over-year in the third quarter. Operating loss was $1.6 million, compared to $1.4 million last year. Non-GAAP operating income was $3.9 million, or 6% of sales, compared to $1.1 million, or 1.8% of sales last year. Interest expense was $700,000 compared to $100,000 last year, driven by incremental borrowings related to our acquisition of the airway clearance business in the third quarter of 2021.
Income tax benefit was $77,000, compared to an expense of $1.9 million last year. The difference relates to a full valuation allowance being recorded against all net deferred tax assets in the current period, whereas no valuation allowance was recorded for 2021. Net loss was $2.3 million or $0.11 per diluted share, compared to a net loss of $3.4 million or $0.17 per diluted share last year. Non-GAAP net income was $1.9 million, compared to a non-GAAP net loss of $1.6 million last year. Weighted average shares used to compute GAAP diluted net loss per share, or $20.1 and $19.8 million in the third quarters of 2022 and 2021, respectively.
Adjusted EBITDA increased 74% year-over-year to $7.2 million, or 11% of sales compared to $4.1 million or 7.8% of sales last year. As of September 30, 2022, we had $23.4 million in cash and $49.8 million of outstanding borrowings. This compares to $23.4 million in cash, and $50.5 million of outstanding borrowings as of June 30, 2022 and $28.2 million of cash and $55 million of outstanding borrowings at December 31, 2021.
Turning to a review of our 2022 outlook, which we updated in our earnings press release today, we’re raising our full year guidance range to account for our stronger than expected performance during the third quarter of 2022. We now expect total revenue in the range of $242 million to $245 million, which represents growth of approximately 16% to 18% year-over-year. This revised outlook compares to our prior revenue guidance range of $238 million to $242 million, representing growth of approximately 14% to 16% year-over-year.
Our updated 2022 total revenue guidance range assumes sales of our lymphedema products in the range of $207 million to $209 million, representing growth of 2.5% at the midpoint of the range, consistent with the growth expectations in our prior guidance range, which also points to growth in the second half of 2022 in the mid single-digits and sales of our airway clearance products in the range of approximately $35 million to $36 million. This compares to our prior guidance range of $30 million to $32 million.
For modeling purposes, for the full year 2022 we expect gross margins in the 71% to 72% range, our GAAP operating expenses to increase 26% to 28% year-over-year, compared to 23% to 24% previously, the higher expected growth in our-GAAP operating expense for this year is driven primarily by non-cash, intangible amortization and earn-out expense of $3.3 million in Q3 and approximately $500,000 of executive transition and legal expenses, neither of which were contemplated in our prior guidance ranges.
Note, our updated full year guidance now assumes legal expenses of approximately $3.5 million compared to $3 million previously, executive transition costs of approximately $300,000 recognized in the third quarter and not contemplated in our prior guidance, interest expense of approximately $2.8 million compared to $2 million previously, and fully diluted weighted average share count of approximately 20 million shares. In 2022, we now expect to generate adjusted EBITDA of approximately $15 million to $16 million compared to our prior guidance of $14 million to $16 million. In addition, our adjusted EBITDA guidance range excludes certain non-cash items, including intangible amortization and estimated changes in contingent consideration of approximately $14.8 million compared to $11.5 million previously. Stock compensation expense of $11 million compared to $12 million previously and depreciation expense of approximately $2.4 million.
We continue to expect to deliver improving cash flow from operations and profitability in the fourth quarter. Specifically, we expect cash flow from operations in the fourth quarter to exceed the expected cash outflows, including operating capital needs, debt service and the earn-out payment related to the acquisition of AffloVest due in Q4. Note that we recently updated the terms of this earn-out payment to $5 million due in Q4, with the remaining $5 million dollar balance deferred until May of 2023. In summary, we remain confident in our balance sheet and financial condition.
With that, I’ll turn the call back to Dan for some closing remarks. Dan?
Dan Reuvers
Thanks, Brent. As Brent mentioned, we are raising our total revenue guidance for the second time this year to account for our outperformance in the third quarter. We are proud of the financial performance that we have achieved so far this year, along with the enhancements made to our product portfolio and our sales force and company leadership.
Looking ahead to the fourth quarter, in our airway clearance business, we expect the solid demand that we have seen to-date will continue paced somewhat by our current supply constraints. As I mentioned earlier, our team is working diligently to secure additional production capacity to support future demand. And I want to underscore how well our operations team has done in supporting growth beyond our expectations, especially in one of the most challenging supply chain environments we’ve seen. Their efforts should ensure we are well positioned in 2023 to continue penetrating the greater than $5 billion market opportunity that lies ahead of us in airway clearance as more of the estimated 4,000 plus respiratory DME reps begin identifying qualified patients that stand to benefit from our airway clearance therapy at home.
In our lymphedema business, we remain cautiously optimistic about our expectations regarding the pace of recovery given the dynamics that I outlined in our second quarter earnings call in August. Specifically, our team continues their work to reestablish ourselves in those accounts that went unrepresented a couple of quarters back when sales vacancies were more prevalent. Overcome patient volumes at clinics that remained below pre-COVID levels and navigate the headwinds created by payer dynamics, where we have seen some commercial payers favoring the use of a basic compression device as a precondition to becoming eligible for an advanced device. With that said, in the fourth quarter, we continue to expect strong sequential improvement and improving year-over-year performance in our lymphedema business.
In terms of our operational priorities, we remain focused on driving continued execution with respect to the following four objectives: the productivity of our sales reps that we have hired over the last 12 months as we enter the fourth quarter, which as a reminder typically benefits from seasonal strengths, with more patients covered under commercial insurance plans meeting their annual deductibles; number two, continuing to facilitate and leverage the successful introduction of our new ComfortEase garments and Kylee mobile app; three, helping current and future respiratory DME channel partners to integrate and feature AffloVest to their prescribing clinicians and patients, while expanding our capacity to meet that demand; and finally, improving profitability by continuing to advance operational efficiencies with a focus on reducing overall cost to serve.
We believe our continued execution on these objectives will help enable us to achieve fourth quarter total revenue in the mid-teens, generate GAAP net income profitability and finish the year with over $20 million in cash and equivalents. We remain committed to bringing 2022 to a strong conclusion and returning to sustainable growth and improving profitability in the years to come as we continue to reveal and treat underserved patients in the lymphedema and bronchiectasis communities.
I’d like to thank and congratulate our employees for their dedicated efforts this past quarter. We appreciate your commitment to the success of Tactile Medical and to the well-being of the patients that we serve.
Operator, we will now open the call for questions.
Question-and-answer Session
Operator
Thank you, sir. [Operator Instructions] And our first question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.
Ryan Zimmerman
Good evening. Thanks for taking the question, Dan and Brent and congrats on the progress. It sounds like you guys are turning the corner on a lot of macro factors this year. So, maybe just the first question for me, I know we are not going to get ‘23 guidance. But I’d love to understand kind of your underlying assumptions both within the lymphedema segments and also the AffloVest or the respiratory segments, how to think about the growth of that AffloVest products into next year and kind of what you are expecting in terms of just maybe the normalization of patient volumes in the lymphedema clinics? And then I have a follow-up on the balance sheet.
Brent Moen
Hi, Ryan. It’s Brent. Good afternoon. So I will talk to you a little bit about that. Certainly, I think we have always talked about the second half of the year being where we are going to start to demonstrate a return to growth. And I think our results today at 24% revenue growth was a strong indicator that we are going to deliver on that promise. I think what we are starting to see is, we finished the quarter with a lymphedema sales team that is at where we expect them to be at the end of the year. So they will contribute strongly in our fourth quarter. We continue to see very strong demand from AffloVest. And we expect that certainly to continue as we move into 2023. So, a lot of the headwinds that we had talked about earlier in terms of staffing and access seem to be subsiding a bit and providing us the benefits that we recognized in Q3 and expect to realize in Q4 as well.
Ryan Zimmerman
Okay, that’s very helpful, Brent. And then I want to turn to the balance sheet for a second. This question comes up from investors from time-to-time, but the cash balance has kind of stagnated. You are not really burning cash, not really gaining cash, help us think through just your ability to sustainably generate positive cash flow next year kind of the durability of profitability on the company and kind of what we can expect the thing to see on the balance sheet over the coming quarters?
Brent Moen
Yes, it’s a good question, Ryan. And you are right we do get that question often. And I think the indicators are again turning favorably as we push through Q3 and then into Q4. I think with our announcement today that we were going to increase revenue guidance and then also correspondingly, our adjusted EBITDA guidance gives us some comfort that we are going to start to see improved profitability. As you said, I know you are not asking for ‘23 guidance, but I’ll let you know that we are actively working on our 2023 annual operating plan and it takes the village. So, all of the senior leadership here are actively looking at profitable growth opportunities that will benefit 2023 and our multiyear outlook. So as we push into 2023, we certainly believe that we will be able to expand our adjusted EBITDA margin. And as we know that’s a bit of a proxy for cash as we go forward. And let me just touch on the balance sheet, specifically that’s to your question, we finished Q3 with $23.4 million of cash, roughly the same number that we ended 2000 – or Q2 with. But keep in mind, during the course of the 9-month period year-to-date we paid down $6 million of principal on our debt, on top of having to fight some lawsuits that certainly are expensive when it comes to legal fees. But aside from those two items, we did generate cash in the nine month period for year-to-date. But that said, we do also expect Q4 to be profitable, that will be a generator to help offset the earn-out payment that will get made here in the fourth quarter as well. So, I guess in summary, we remain really confident about our balance sheet and the financial condition of the company.
Ryan Zimmerman
Thanks Brent.
Operator
And our next question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.
Unidentified Analyst
Hi, Dan. Hi, Brent. This is Simran on for Adams. Thank you, guys for taking the questions. I guess I will start off with the guidance. So, just doing quick math here, the guide does imply low teen sequential growth in the lymphedema business in Q4, but a pretty big step down on a sequential basis for AffloVest. Maybe walk us through some of the key assumptions there. And specifically, why we should expect to see that dynamic for AffloVest?
Dan Reuvers
Yes. You are talking about the $11 million and then the step down a little bit in Q4 is the expectation, that’s a good question, Simran. The reason is really led to supply chain issues. So, we were fortunate to have been able to get out ahead of ourselves in Q3 on some of the demand that was there. But a spot by we were able to acquire some additional batteries, and equipped the second source supplier, such that they were able to deliver their first tranche of product to us. We are still sort of in a hand to mouth stance on that one. So, the backdrop for our guidance on Q4 as it relates to AffloVest is largely driven by the supply capacity we think we can generate. I think to the credit of our ops team, they have certainly outperformed given where we expected at the beginning of the year, as we continue to see the momentum build. I think they have responded well in a very difficult environment. And we are also at the point now where I think we are getting good enough line of sight into 2023, where we think we are going to be entering with a much better position on sustainable supply chain, which is going to be important as we continue to try and build demand and support for our DME partners.
Unidentified Analyst
Got it. Okay. That makes sense. And maybe just a quick follow-up on that same topic, can we get a sense of how many DME accounts you are selling AffloVest. And the kind of growth in new versus existing DME accounts. And then maybe just, since 2023, is kind of top of mind, where do you expect that mix to go in 2023?
Dan Reuvers
Yes. Let me just take a step back and say, we are just really pleased with the business that we found in the AffloVest. I think that the DME channel was one that we had to explain a little bit at the beginning. But I continue to be convinced that this is precisely the right channel, because they have access to all of these complex respiratory patients, and all of the other solutions that they need short of the airway clearance product, and affordable one at that. So, we think there is ample runway of growth here. We have not added a lot of DMEs per se. But what we have been doing is adding more branches and more participating reps within those DME channels that we have had. It’s as you can imagine, it’s an 80-20. There is a handful of bigger DMEs. And then there is a lot of smaller ones that, we work with as well. But it’s been less about adding DMEs at this point, as I said more about ongoing working and educating the sales channel, supporting them. And we are seeing the growth as a result of more branches participating and more reps participating. And I think the last one to add is this continues to be a very solid reimbursement area. CMS reimbursement is over $13,000 for the category. So, it’s a good business for our DME partners. So, that’s kind of a recipe success – for success when it’s a good business for both sides.
Unidentified Analyst
Got it. That’s it for me. Thank you, guys.
Operator
And our next question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.
Margaret Kaczor
Hey, guys. Good afternoon. Thanks for taking the question. I was hoping to first start on lymphedema and focus on guidance a little bit. So, I will give Ryan’s question a second shot here. Given you are suggesting kind of mid-single digit growth, I guess in the second half of this year for lymphedema, what does that imply for 23? And if you don’t answer that, then maybe, how do you get back to that double-digit growth rate? And when can that happen? Thanks.
Dan Reuvers
Yes. I think it’s a good question, Margaret. I think first of all, on the lymphedema side, we have seen some recovery in the patient volume. So, we have talked a little bit about that. We are not at pre-COVID levels, but we are seeing some good improvement there. I think the opportunity for us to demonstrate improved productivity will be an important part of the ‘23 recipe. I think that probably the most foretelling piece is the fact that we were negative in growth in the first half. It’s been a tale of two cities. The second half, we just grew 5% in the third quarter, our guidance would imply something in the upper-single digits in the fourth quarter. And all I can say is we certainly think that that puts us in a much better on ramp to 2023. I think we are in a better position right now than we have been all year long as it relates to both sides of the business. But I think that the upper-single digit growth that we will be exiting in Q4 certainly is – it’s a good way for us to enter 2023.
Margaret Kaczor
Okay. Perfect. And then I wanted to switch over to AffloVest. I know everyone knows you as the lymphedema company. But on the same token, AffloVest has just been surprising quarter-after-quarter-after-quarter. So, I guess the question I have is, do you have any sense of what the underlying demand is, as supply improves? Especially as we look into ‘23, I can have to bring that up again, but how much more demand I guess could you see, could that 11 and actually be 15 based on what you guys are saying are much above that, I guess? Thanks.
Dan Reuvers
Yes. I think that we would probably have certainly had a little bit of a tug of war between supply and demand over the course of the year. And I think that as we start to look forward, there is certainly plenty of runway left, if that’s kind of the question. I think if we look at the size of the market, it’s significant. And what we also know is that the majority of reps, we still are not at the inflection point with the reps at the larger DMEs. The ones that have gravitated to it have done well. But I think there is a big opportunity for us to continue to get better coverage. Keep in mind, we are still in the early days. I mean this is kind of the first full year it’s been under our ownership. It took us a while to get acquainted with all of the DME partners that we have got. This is the first year where a couple of them. And this is one of the reasons that I think the growth has been so impressive is they have started to make it a more focused product. And when you have aligned incentives all the way down to the sales channel, at the rep level, typically it gets the kind of attention it deserves. We have talked in the past, I think too, about the fact that a placement of an AffloVest is really almost on par with placement of a non-invasive ventilator. And there is very little left in the respiratory bag of solutions that’s at the same kind of economic threshold. So, we know it’s a really big market, not ready to do ‘23 yet, but I can certainly suggest that we are still very enthusiastic for what ‘23 has got in store for us. And there is still an opportunity for us to add some additional DME partners as well, not everybody is on our dance card yet. But it seems a little premature for us to pursue some of those others, if we didn’t think that we had the capacity to support it. So, we want to make sure that we are in a good position when we bring a partner on that we can support them. But I think if we can finish up this year in this $35 million, $36 million range with AffloVest, we think that we are going to have a lot better foundation and participating DMEs and reps and should be in good shape for next year.
Margaret Kaczor
Great. Thank you very much.
Operator
[Operator Instructions] Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.
Suraj Kalia
Good afternoon Dan and Brent, can you hear me, alright?
Dan Reuvers
Yes. Good afternoon Suraj.
Suraj Kalia
Perfect. Hope everyone is safe and healthy. So, Dan, one of your comments caught my attention, which was on the commercial requirement change, presumably similar to the Medicare requirement of going with active touch first before going to – before Flexitouch? I was wondering if you could expand on that. What has been the specific change? What is the extent of this change that you are seeing and how do you plan for it moving forward?
Dan Reuvers
Yes. Good question. And this is one that we actually raised. As you probably recall, even last quarter Suraj. One of the things that we had mentioned, last quarter we had seen was some Medicare Advantage plans operated by commercial companies starting to apply the Medicare criteria, as opposed to their commercial criteria, which may have been a bit more lenient. And as a consequence, with a couple of Medicare Advantage plans, it shifted mix, meaning we know that Medicare typically requires 651, which would be our entree before they would become eligible for our Flexitouch. If they can be treated successfully with a 651 or an entree, then that’s the end of it. If they don’t or can’t be treated effectively with an entree, then they become eligible for a Flexitouch. So, that was the mix issue that we had described. We had seen a little bit of a phenomenon of in Q2, I think we saw a bit of that in Q3 as well. On the – so, I think the good news is with our performance in some of the Medicare Advantage plans, we saw more entrees going out than we had in the past and still delivered a solid mid-single digit beat. And it meant that we actually captured more patients on that front. On the Medicare side, we saw really good growth in the vascular, particularly with Flexitouch. And I think that that points to a couple of things. One ComfortEase has been well received, because ComfortEase is really targeted to those patients with bilateral disease and those that have truncal swelling and need therapeutic support in the trunk area as well as in their legs. So that really kind of points to the ComfortEase traction that we saw. But I think the other point there is that, as we continue to see a larger universe of patients on Medicare that have gotten an entree over time, we are seeing that there is a segment of them that needs and we expect will benefit from Flexitouch, and that that segment of the business actually did quite well in Q3 as well.
Suraj Kalia
Fair enough. And Dan, my final question. You talked about ComfortEase, the new garments, patient comfort, so on and so forth. And then this keeps coming up, obviously new entrants to the marketplace. Compliance is an issue. Compliance with Flexitouch is an issue that is usually brought up by some of the new entrants into the marketplace. I am wondering if you could phrase the use of ComfortEase, specifically from a perspective of who was the compliance before? And who does the compliance afterwards and help us to make some correlations to what – core lymphedema growth could eventually track to? Gentlemen, thank you for taking my questions.
Dan Reuvers
Yes. Thank you, Suraj. I think the compliance component, certainly we expect ComfortEase will add to the benefits for those patients, because they are going to find it easier to apply, easier to use, and subsequently, more likely to complete their therapy. I think if you are commenting on perhaps there was a [indiscernible] out there talked a little bit about the compliance. I think at a recent conference. Their experience, I think was documented on 20 odd patients. So, I am not sure that I would quite align with the stance that, compliance has been an issue. But we do know that the easier the patient experiences, human nature is, the more likely they are going to complete their therapy. So, that’s one of the reasons – one of the key reasons that we introduced ComfortEase. And it’s also the backdrop for what our new product pipeline has in store, a number of attributes, namely, including making sure that we have got the right therapeutics available, that we can continue to make this a ubiquitous kind of easy patient therapy experience.
Operator
Thank you. We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you all for your participation and have a great day.
End of Q&A
Dan Reuvers
Thank you, operator and thanks for everyone – to everyone for participating on our call. We look forward to sharing the results of our full fiscal year in February.
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