Apollo Endosurgery, Inc.
Q1 2022 Earnings Call Transcript

Published: 3 May 2022

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery First Quarter 2022 Results Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Matt Kreps. Sir, the floor is yours.

[Matt Kreps:]

Thank you, John. And thanks everyone for participating in today's call to discuss Apollo's first quarter 2022 financial and operating results. Joining me on the call are Chas McKhann, Chief Executive Officer and Jeff Black, our Chief Financial Officer. Today's call will include slides to accompany the audio presentation. For those of you joining us by telephone-only, you can download a copy of the slides at our investor relations site, ir.apolloendo.com and choosing Events and Presentations. Before we begin, I’d like to caution listeners that comments made by management during this conference call today will include forward-looking statements within the meaning of federal securities laws, including Apollo's financial outlook and Apollo's plans and timing for product development and sales. In addition, there is uncertainty about the continued spread of COVID-19 virus and the ongoing impact it may have on our operations, the demand for our products, global supply chains, and economic activity in general. These forward-looking statements involve material risks and uncertainties, and Apollo's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K and our most recent Form 10-Q. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 3, 2022. Except as required by law, Apollo undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. Additionally, today's discussion will include certain non-GAAP financial measures, which we believe provide an additional tool for evaluating the company's core performance. Management uses these metrics in its own evaluation of continuing operating performance, and a baseline for assessing the future earnings potential of the company. Included in our press release issued today is our financial results and corresponding 8-K filing, our supplemental tables reconciling non-GAAP figures to their closest GAAP comparable. And now I'd like to turn the call over to Chas.

[Chas McKhann:]

Thank you, Matt, and thank you, everybody, for joining us here today. We really appreciate it. So look, we are about a year into a new strategy to transform Apollo. And I'm really excited about the progress that we've made in a relatively short period of time. We've repositioned the company to go after larger market opportunities, and we're building a much stronger organization that's poised to capitalize on those opportunities as we focus on energizing the business and then over the course of this year, moving into an acceleration mode and eventually building leadership positions in the markets we serve. This afternoon, we reported solid performance for the first quarter of the year with sales of $16.7 million, and that was even in the face of the Omicron wave that impacted a lot of companies and procedures around the world really, and then other global macroeconomic challenges, which we'll refer to over the course of the call. But despite that, and I'll -- some of the highlights for the quarter, we achieved 20% year-on-year growth. And it was well-balanced growth. It was 24% in our ESS franchise. That's our OverStitch device and our X-Tack product. And we also achieved 16% growth with our intragastric balloon franchise, and so again, nice balance across our products. This quarter, our growth was primarily driven by the US with 33% growth in the US, 40% for IGB franchise, 34% for ESS, so really nice performance here in the US. An interesting fact here over what we've observed, and this is an extension of what we reported on our prior call. Our top 10 accounts grew by 63% year-on-year. And these are not distributors, these are individual accounts. And the average sales in those top 10 accounts, is right around $1 million annualized. So it gives you a sense of what we can achieve, when our customers really incorporate Apollo's products into their clinical practice and really make it a focus of patient care. And then in addition, we achieved 14% sequential growth in the number of ordering accounts for X-Tack here in the US. And we also achieved sequential sales growth in terms of -- so ordering accounts up 14% as well as sequential growth in X-Tack sales quarter-on-quarter. And so while delivering on a strong quarter, we also remain very focused on a broader set of priorities for the overall year, both delivering on the near term but also building the foundation for the growth in years to come. And so, our four main priorities. First is to expand our core GI business and defect closure and fixation. And that's inclusive of both OverStitch and X-Tack. It involves training new users, continue to build adoption and preparing for the approval of X-Tack, the CE mark approval outside the US. Second priority is leveraging a resurgence in ORBERA. The intragastric balloon franchise has done very well since I've gotten here, and it's been a big important part of our business, continues to grow. We want to make sure that's sustainable growth, and we're putting a lot of focus and energy behind that. And that fits part and parcel with our third priority, which is preparing for the launch of Apollo ESG and Apollo REVISE. We're working through the process with the FDA for a new regulatory clearance and preparing for the new product launch associated with that. And all the while building the organization. We need to have the right capabilities in place to make sure that we can go after those opportunities, and we've been making very important ads really top to bottom, and I will come back to that. So, Jeff is going to provide some updates on the financial results in the quarter, and then I will come back and talk through each of these four priorities to give you updates on how we're doing against each of them. Jeff?

[Jeff Black:]

Thank you, Chas, and thank you, everybody, for joining the call today. As Chas said, I'll spend a few minutes here on a little bit of a deeper dive into the financials and then turn it back over to Chas for a more detailed business update. Starting with slide 7 on revenue, again, a strong year-over-year growth across the product portfolio. It was our fifth consecutive quarter of double-digit growth. And excluding the legacy Lap-Band business, this was the largest revenue quarter on record for Apollo. 33% growth in the US, so we are beginning to see the impact of our planned investments, specifically the expansion of the sales force, while still early stages, we're beginning to see traction and increased productivity. We saw a continued strength in ORBERA on the heels of enhanced marketing efforts. And again, still some lingering effects of COVID on hospital access and staffing, particularly in academic hospitals, where core GI business is typically very strong. We saw 6% growth outside the US, strong demand in distributor markets, offset by continued pressure in the quarter in concentrated direct markets, particularly Western Europe, where we also believe to be lingering pandemic effects. Significant foreign currency impacts, particularly for the euro, which had a nearly $300,000 impact on year-over-year growth. On a constant currency basis, our OUS growth was 10%. Global growth was 22%. And just as a reminder, because international sales represent more than 40% of our overall revenue, we're disproportionately impacted by negative foreign currency impacts compared to similarly sized Medtech companies that typically don't have such a large OUS footprint. Other revenue, while it's not material, it was impacted by our planned wind down of Apollo Care for Orbera, which we outsourced to a third-party beginning in 2022. This will ensure we can properly scale support for Orbera, as that business continues to expand without a material financial impact to Apollo. Overall, we're again pleased with our revenue performance in the first quarter and our ability to successfully navigate a generally slow start for Medtech. In terms of outlook for 2022, we continue to expect 2022 revenue of $73 million to $75 million, while we're cognizant of potential global recessionary impacts, lingering pandemic headwinds and foreign currency pressures from a strengthened dollar, particularly for the euro, which currently represents nearly half of our OUS revenue. Moving to gross margin on Slide 8. Gross margin improved by 210 basis points over a year ago. In the US, our margin increased from a higher Orbera mix as well as margin expansion on our ESS product lines. We're seeing the impact of 2021 OverStitch COGS improvement projects. We're seeing improved overhead efficiencies, and we also saw some price increase impact for both OverStitch and X-Tack. The margin expansion that we saw in the US was offset by a higher mix of distributor sales, OUS, which have a lower gross margin profile. We remain focused on continued gross margin improvements, particularly with OverStitch, which has a lower gross margin profile than the Orbera and X-Tack. So major drivers continue to be in gross margin expansion in the future will be product mix, improved overhead absorption, direct COGS improvement programs, like I said, focused primarily on OverStitch. And at the same time, we're navigating supply chain and manufacturing scale-up complexities, but we remain confident that we'll drive blended gross margin to the mid-60% range in the next three to five years. Moving to OpEx on Slide 9. As we look at operating spend profile, as we've done in the past, we think it's important to exclude non-cash stock-based compensation to get just a clearer picture of what our non-GAAP core operating run rate is. And as we previously said, 2022 is an investment year for us. In the near-term, we remain focused on building capabilities following historical underinvestment in the business. The most significant area of increased investment is in sales and marketing in the United States. For example, in the fourth quarter, you'll see our non-GAAP sales and marketing OpEx ran at about 48% of revenue. This reflects our planned investments in growth initiatives, primarily building out the channel, marketing programs as we prepare for the anticipated launch of our ESG products. As we've said before, in the US, we still have a very small commercial team relative to the size of our opportunities. We made substantial progress a year ago or last year, expanding our footprint. We continue to do so. At the end of 2021, we had a commercial team of just under 30 in the field. We grew that to 30 territory managers and two regional Endobariatric managers at the end of the first quarter. This team is ramping up. We anticipate further improvements in rep productivity as they gain additional time and territory and experience with our products and customers. Going forward, we continue to evaluate the appropriate scale of our commercial team and we'll invest as necessary. Other focused area of our planned investments, are in R&D, medical education, clinical reimbursement, product development and gross margin improvement. And on the G&A side, we will continue to thoughtfully invest in infrastructure and staff to properly support the business, but we expect to see the heaviest investment in both sales and marketing and R&D. Importantly, that we have the ability to modulate spend as appropriate. And we're well positioned from a balance sheet perspective to make these investments. So with that said, before I turn it over to Ted, just a couple of comments on cash use and burn. Moving to our balance sheet, slide 10, as you may recall, last year, we secured over $175 million in new capital and borrowing capacity, enabling us to begin making investments required to capitalize on the opportunities in front of us without really creating a concern about cash runway. This positions us very well, with a multiyear runway to execute the business, which is especially important now in what has turned out to be an uncertain and volatile capital markets environment. As we expected, we saw a planned up-tick in cash burn in the first quarter relative to 2021. Of particular note, nearly 1/3 of that burn was $2.9 million in working capital, which represents the pay down of 2021 year-end accruals as well as inventory builds to support the expected growth in demand for our products. Even with our planned increase in average quarterly burn, we're extremely well positioned to execute on our planned growth initiatives with nearly $150 million in cash and committed cash at the end of the first quarter. And with that, I'll turn the call back over to Chas.

[Chas McKhann:]

Thank you, Jeff. So turning to slide 12, just a quick reminder for those who are new to Apollo, we've got our three different product lines, our X-Tack product, OverStitch and the ORBERA intragastric balloon and that's really focused across two different therapeutic areas

[Operator:]

Thank you. Ladies and gentlemen, the floor is open for questions. Okay. And the first question here is coming from Matt Hewitt with Craig-Hallum Capital. Your line is live

[Q – Matt Hewitt:]

Thank you. And congratulations on the strong quarter, kind of bucking the normal seasonal pattern, especially given the headwinds you faced in January from COVID. I guess my first question is regarding progress with X-Tack, I think last quarter, you really started to focus on your desire to drive utilization. I think during your prepared remarks, you mentioned 14% growth, if I heard you correctly. Do you have kind of a target that you're hoping to hit from a utilization standpoint, or how should we be looking at that over the remainder of this year and going forward?

[A – Chas McKhann:]

Yes. No, Matt, thank you. Appreciate the question. We were pleased with sequential growth, both in new accounts as well as in overall utilization with X-Tack. That was despite what often we do see some seasonal patterns as well as there was a pretty significant COVID impact here in the first part of the quarter. It improved as the quarter progressed. I think that's a very consistent theme with other med tech companies as well. And so we will look to continue to build on that same kind of quarter-on-quarter additional growth as we -- as our newer reps get up to speed as it were as new data comes out, all the different elements I mentioned. And so we feel good about a prime continued sequential growth quarter-to-quarter, and that's what we'll be looking for from our US sales team. And then over time, we'll add on the US side of that as well.

[Q – Matt Hewitt:]

Understood. Okay. And then one of the questions that I get a lot, especially here over the past couple of weeks when others from -- on the device side have been reporting is this question about how much of Q1, were you seeing a rebound in just getting back to normal, or was there some backlog to kind of work through? And maybe if you could walk through what you're seeing even now through April, are we getting back to a normal that it's not so much a backlog. This is a normal growth rate for the business and what we should be expecting going forward?

[A – Chas McKhann:]

Yes, it's a good question and one that's a little hard to tease out, except to say that we certainly saw an impact in late last year and early this year. We did see a nice improvement over the course of the quarter. But I think it varies by different segments and different markets. We didn't see a sort of snapback rebound that, I think, for example, orthopedics, some did. Because where we saw the biggest impacts were in some of the larger academic medical centers and the equivalents in places like Europe, and those have come back, but a bit more gradually because you have a combination of both COVID, but also -- and I'm sure you guys have all heard about various staffing-related issues that impact a lot of those same institutions. So we're seeing an improvement, but we haven't really felt it as a snapback rebound more just a good gradual improvement and I think we're tracking in the right direction.

[Matt Hewitt:]

Got it. And then maybe one last one for me, and I'll hop back in the queue and it kind of touches on what you're just saying there, as far as staffing issues and some of that, I think, at least on the hospital side, as we're reading it is some doctors are just transferring from one hospital to another. In other cases, they are leaving the market. But does that -- I would imagine that, that actually can represent an opportunity for you as well, a doctor that's familiar with OverStitch and Orbera and X-Tack and leaving one practice and going to another, bringing you along gives you a new in a new group to train or bring up to speed. Are you seeing some of that with some of the issues that healthcare has been seeing on the hiring side, or what could -- what do you think is going to drive that next leg of adoption, or is it just hitting the payment and introducing the products.

[Chas McKhann:]

Yes. Now let me separate out two things. I think the bigger constraint we've seen has been more on the nurse side than on the physician side. And again, these have been well documented and just in the types of settings I've mentioned. And I think the situation is improving, but that's been coming out of COVID, just a challenge for certain institutions. And I think, like I said, they're starting to get a handle on it and it's improving. On the physician side, there is some movement, but mostly for us, it really is just a matter of continuing to train new users for -- across our products. And then doing, as you said, the leg work once someone is trained, making sure they become totally comfortable with the devices and the procedures and expanding the different kinds of procedures they can use it for in the case of both OverStitch and X-Tack. And in the case of the Orbera side of things, understanding how to really develop their practices and patient marketing some of those other areas where we're doing some of the co-marketing elements.

[Matt Hewitt:]

Got it. Thanks very much.

[Operator:]

Okay. The next question is coming from Adam Maeder with Piper Sandler. Your line is live.

[Unidentified Analyst:]

Hi, Charles and Jeff, this is Simran on for Adam. Congrats on a great quarter, guys. I guess I'll start off asking about just kind of your business and exiting Q1, you said there's some momentum with recovery. So how should we think about models in Q2 and quarterly cadence throughout the duration of the year?

[Chas McKhann:]

Sure. We've -- we've been investing, as Jeff mentioned, in different aspects of growth. And so certainly are looking to continue to see that. We saw a good evidence of results of that in Q1, but I do expect to see that progress. And certainly to achieve our guidance range for the year, we expect that to continue to step up and are focused on delivering on that. And that will be globally based to get things like some order patterns outside the US with some of our distributors as well. And so we feel good about a nice progression here and reiterating our guidance even with -- and Jeff alluded to this, but just to be really clear, we do have a bit of a headwind on the FX side, more than most companies our size, but are still focused on the guidance we've delivered and internally, we want to exceed that.

[Unidentified Analyst:]

Okay. Perfect. Should we be seeing any meaningful impact from the cadence of new product launches that you could potentially be having this year in terms of ESG revised as well as OverStitch in Japan, just kind of what can you say about the impact of these launches and approvals?

[Chas McKhann:]

Sure. Yeah. No, so for ESG and revise, when we submitted to the FDA, which was back in -- late in Q3 of last year, we said that on average, de novo 510(k) take about a year. That is average. There is -- there are wide error bars in those data because de novo 510(k) almost by definition, have a little bit more uncertainty than a traditional 510(k). So it's a little hard to pinpoint. We are preparing for it, and we hope to see that in the second half of the year and doing everything we can to support that process. The -- another big launch that we are working on, clearly, is the X-Tack launch outside the US. We have spoken on previous calls about there's a regulatory change in paradigm going on in Europe. There's a transition to the medical device regulations MDR. You guys may be familiar with your other med tech companies you follow as well. The net result of that is just things are taking longer. And so if we do see an impact, it would be later in the year that we expect, and we said that throughout that it's going to take a while. And then the Japan side for OverStitch, we're very pleased to get the clearance. As I mentioned in my comments, there's still some regulatory work to be done to really open up the market around OverStitch, but it will, I think, on the margin, have some positive impacts on our US business.

[Unidentified Analyst:]

Okay. Perfect. And then if I could squeeze in one more. Anything to call out from a supply chain standpoint? And just going off of that, how should we think about gross margin trajectory this year with those gross margin improvement projects that you guys are working on for OverStitch in particular?

[Jeff Black:]

Yeah, Serena , this is Jeff. Yeah, I think as we've said in the past, I think -- we don't expect that we'll see any sort of step change in margin. It will be a gradual improvement. And a lot of what you saw in -- or what you saw in Q1 was really a mix of a number of factors, overhead efficiency. And as we improve the top line, we'll start to see even better efficiencies on overhead absorption. We did start to see the impact of the cost improvement projects that we executed last year. We'll continue to see those. So I would say expect more of a gradual improvement as opposed to any step change in any single quarter. Your question on supply chain, I would characterize our supply chain complexity is less about supply and more about just ensuring that we are working closely with our contract manufacturers on capacity and staffing. But we've not run into any situations where we're overly concerned about either incremental costs that we're not expecting or significant capacity constraints that we're not able to address.

[Unidentified Analyst:]

Okay. Perfect. Thank you for taking my questions.

[Chas McKhann:]

Thank you.

[Operator:]

Up next, we have Chris Cooley with Stephens. Your line is live.

[Chris Cooley:]

Good afternoon and congratulations on a great start to the year. Just two quick ones for me, if I may. First, when you think about your top 10 accounts, that was very impressive when we think about the sequential dollar or the implied annual run rate growth coming from about $600,000 at the end of last year to approximately $1 million now. Could you help us better understand the characterization of these accounts? I'm assuming these are primarily endobariatric practices, but what's leading to that kind of step-up in growth? And then how do you scale that beyond those top 10? I've got one quick follow-up after that. Thank you.

[Chas McKhann:]

Yes, Chris. We're excited to see the traction that some of these larger accounts are getting. And it's a mix in terms of the nature of the accounts. Some of them are not endobariatric. I mean they're just kind of broad-based users of across the portfolio, some of the larger academic centers. But I would say the majority -- and this is -- it's a global list, so inclusive of both the US and internationally are some of these early adopters are really embracing the endobariatric side of things. And so for that group, that goes back to a bit of the homework we're doing on how they're approaching the markets, right? They are seeing a really good response to, frankly, the procedures they're offering, right, between intragastric balloons and being a part of that for many of them, not all, but for most. But then also with the ESG and endoscopic revisions, it's a nice affirmation for us that the value proposition resonates with patients. And that's true today even in a primarily cash pay environment or as I've mentioned before, in the kind of case-by-case reimbursement situations that some have access to. But it's been really nice to see. And we will be excited at a time when we do have indication to say how do we support that or look to ways that others can follow in their footsteps.

[Chris Cooley:]

Appreciate the additional color there. And then you touched on this a little bit in a prior question, but I just want to make sure we fully appreciate the underlying kind of trends here. But when we think about X-Tack, I realize it's still very early days there. But just going back to the third quarter of last year and in the fourth quarter, and then now, we've had a fairly decent deceleration sequentially in the growth rate. And you touched on COVID, obviously, as we started the calendar year, some seasonality there and I'm assuming heightened focus on OverStitch post the MERIT study. But can you just kind of help us unpack a little bit that sequential deceleration in the growth rate from the 4Q to the 1Q? I think it was 40 to 14, if I have my math correct and 70 back in the third quarter, which I would assume would be arbitrarily high as you were ramping up. But just help us kind of understand that trend and then how we should think about that going forward here throughout calendar 2022? Thank you.

[Chas McKhann:]

Yes, I think there are a number of factors going on, Chris. One is there is some things around, for example, both seasonality and some COVID impacts, which impacts a bit of what you see in terms of those numbers. We also see, as you move from an environment early on in the launch where a lot of it has to do with some stocking of new accounts and moving to true utilization. And so I think our utilization -- our underlying growth in utilization is probably a little higher from that standpoint. And then we're continuing, I think, in the kind of focus with our sales team of building that sustainable growth. And certainly, we'd like to see continued and even improved quarter-on-quarter growth. And some of that is just some of the newer folks fully getting up to speed and delivering it and producing at the level we expect them to. So, it's a big focus area for us to make sure we continue to sustain it. And I do think that additional clinical information and critical validation around X-Tack, for example, at DDW meeting, will help a lot.

[Chris Cooley:]

Thank you.

[Operator:]

Okay. The next question is coming from Matthew Blackman with Stifel. Your line is live.

[Unidentified Analyst:]

Hi. This is Colin on for Matt. I wanted to focus on X-Tack for a minute. As you guys mentioned, it's currently underweight in that lower GI use segment, which is really a much broader market opportunity. What are sort of the next steps in addressing that opportunity? Are you focused on education as the first priority, or is it really access to practices with a different focus than your new overage practices, you use OverStitch and ORBERA a lot, or is it really adding that clinical data, which you guys plan to present at DDW? Thanks.

[Chas McKhann:]

Yeah. Thanks, Colin. It's a little bit of all the above. You've kind of touched on a number of the things that we are in the process of doing and have been, but I think are really emphasizing here. One, it's not surprising that we have an established customer base that is more familiar in the upper GI, and so really pushing our reps to move beyond kind of the established customers into a broader set. That is easier to do as we expand our team and they've got kind of smaller territories. And so we're absolutely doing that. We also have better targeting data with more recent clinical procedure numbers that allows them to be able to really focus on where the volumes are and make sure they're engaging the right physicians there. We're doing more in terms of engaging some of the key KOLs that really are the experts in the lower GI and having good -- very good experiences with some of them. But I do think the last piece around clinical data does matter. And so some of the data sets in colonic EMRs, that I mentioned in my opening comments, will be important. We don't know the outcomes of those studies, but we -- anecdotally, we've heard very good things about how people have done. So again, once we certainly know the outcomes of what is presented and both presentations and posters at DDW, being able to leverage that in those conversations. And a lot of the peer-to-peer kind of marketing is really important. I mentioned doing webcast and face-to-face, just making sure people are hearing from their colleagues about how they are incorporating this new approach into their clinical practice. Inertia is a powerful thing in medicine, and we're looking to change that.

[Unidentified Analyst:]

I appreciate that. And then on the new hires in the U.S. at late 2022 and -- a late 2021 and during the first quarter, I was wondering if they're focused on preparing for either the X-Tack U.S. launches or the ESG revised releases and approvals or if they're really focused on selling the full bag of the three products? Any color there would be helpful? Thanks.

[Chas McKhann:]

Sure. So we're kind of doing two things simultaneously. We've got our territory managers that typically are focused on selling each of the products. And especially as a new hire getting up to speed on the training around them, the procedures, supporting the accounts and focusing across all three products. In parallel, Jeff and his comments on one of the slides we've mentioned, this newer role of what we're calling a regional endobariatric manager. These are folks that are either been hired or in some cases, rehired or come back to Apollo, who understand all of the different components that will be required to really have a successful practice kind of from a patient standpoint, before the procedure, during the procedure and after the procedure and can really help support and develop those efforts. For now, it's very much focused on ORBERA, because it's on label for us, and they can kind of focus on those efforts while getting to know the practice is involved. And right now, as Jeff mentioned, at the end of the quarter, we have two of those roles very much was a pilot phase to make sure it's delivering the way we think it can. And then assuming, it does and as we move forward with the indication, that's an area that we would plan to enhance and grow. So you have not a splitting of the sales force, but kind of a layering of different capabilities.

[Unidentified Analyst:]

Great. Thank you very much.

[Operator:]

I would now like to turn the floor back to Chas McKhann for closing remarks.

[Chas McKhann:]

Well, listen, thank you all very much for joining us today. We appreciate your time and your support. On this slide, we have upcoming activities, and you're welcome to join of them. And then otherwise, we really appreciate your time today. Thank you very much.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.