Apollo Endosurgery, Inc.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Apollo Endosurgery Fourth Quarter 2020 Results Conference Call. 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 fourth quarter 2020 financial and operating results. Joining me on the call are Todd Newton, Chief Executive Officer; and Stefanie Cavanaugh, Chief Financial Officer. Before we begin, I'd like to caution listeners that comments made by management during this conference call 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 around the spread of the COVID-19 virus and the ultimate 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 could cause actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's annual report on Form 10-K for the year ending December 31, 2020, filed today with the Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of the day of this live broadcast, February 25, 2021. Except as required by law, Apollo undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this call.

[Todd Newton:]

Thank you, Matt. Good afternoon, everyone. Thank you for joining today's call to discuss our fourth quarter 2020 results. Our expectation coming into the fourth quarter was for COVID disruption to persist, but to be less severe than certainly we experienced in the first half of 2020, and that overall procedure volumes using our products would return to levels similar to the fourth quarter of last year. This expectation was more or less what occurred in our business during the fourth quarter, with the U.S. market being up 15% versus Q4 of 2019, which made up for the more noticeable COVID procedure weakness, which lingered in our international markets, particularly in our European direct markets during November and December. Taken together, our worldwide endoscopy product sales increased 4% in the fourth quarter year-over-year. I am really pleased with our ability to reduce and maintain control over our cash burn in the fourth quarter. Expense reduction programs that were born from necessity due to the coronavirus, along with gradual gross margin progress, resulted in a 53% reduction in our net operating loss in Q4 compared to the same period in 2019 and a 58% improvement in our cash used in operations. The improvement in these 2 important financial metrics should be not just sustainable but can improve from here as our markets stabilize, health care utilization gets back on track and product revenues grow. I'm also pleased to tell you we have completed the X-Tack limited launch. I will give you more detail shortly, but I will tell you now, it went great. And with that, I'll turn the call over to Stefanie to cover the fourth quarter financial results in greater detail. Stef?

[Stefanie Cavanaugh:]

Thank you, Todd, and good afternoon, everyone. As Todd mentioned, the fourth quarter of 2020 overall was a stabilizing period for our revenues, even amid regional COVID disruption fluctuations. On the top line, total revenues increased to $12.9 million, a gain of 7% in the fourth quarter of 2020 from the fourth quarter of 2019. Total endoscopy revenue increased 4% to $12.2 million, with U.S. endoscopy sales increasing 15%, while OUS endoscopy sales decreased 6%. Similar to the third quarter, these results reflect continuing U.S. rebound from COVID-19 and differing trend lines in our 2 OUS sales channels. In our OUS direct markets, endoscopy product sales declined 10% due to ongoing COVID case volatility in the fourth quarter.

[Todd Newton:]

Thanks, Stef. I want to update you on 2 important topics this afternoon

[Operator:]

We have a question coming from Matt Hewitt from Craig-Hallum Capital Group.

[Matt Hewitt:]

And I guess before I get to those, I just want to say, Todd, it's been a pleasure working with you. And best of luck in, obviously, all of your endeavors going forward. I look forward to checking your progress, see where you land next, but congratulations on all the progress that you've made here at Apollo.

[Todd Newton:]

Thank you, Matt.

[Matt Hewitt:]

First question in there, you hit some really key topics. But the first one, on X-Tack, congratulations on the soft launch. How quickly can we start to think about, from a commercial standpoint -- I think you mentioned that you've already got 6-figure orders outstanding, how quickly will that translate into the income statement? And where can that go maybe over the course of the year?

[Todd Newton:]

Yes. Matt, unfortunately, I did mention that I don't feel like I should give 2021 guidance, and that would include ramp rates and the like. I just feel like that's better for the next CEO to come. But I can tell you that I feel like we have a really good level of activity going on right now. As I indicated, the -- those quotes that are in front of accounts where we're going through the new product committee process, sometimes called the VAC process, that is going well. And the limited launch results certainly give us a great deal of confidence as we pursue those opportunities.

[Matt Hewitt:]

Okay. And maybe a different way of asking the question without getting necessary guidance, but how -- help us think about a 6-figure order. How quickly will an account work through something of that size? I mean, is that over a couple of months? Is that a couple of quarters? Just help us size that up.

[Todd Newton:]

Yes. So our view, if you base it off the limited launch results, we are going -- we're using about 2 X-Tack devices per case. And those cases generally are at that 2 -- let's say, 2-centimeter size that we have indicated is really the ideal target for X-Tack or higher. . And so I think it will just depend a little bit upon each individual account and how often they are encountering those, but I can feel confident in saying that our view is that the frequency at which doctors are going to have those cases will be at a greater rate than OverStitch use within a relatively short period of time. Relatively short period being over the next, say, few years, couple of years.

[Matt Hewitt:]

Okay. That's helpful. And then as far as OverStitch is concerned, I think everyone is excited and waiting on the MERIT data. But walk through -- so the data comes out, is it your hope and expectation that Apollo would have some, albeit maybe minor, but have some reimbursement in place even by the end of the year? Or is that more of a '22-type event before the reimbursement starts to layer on?

[Todd Newton:]

Yes. And just to remind you, Matt, I think you certainly you know this from our earlier conversations, we have, in some places, reimbursement today for ESG. And it's just not broad coverage. It's more individual accounts working with specific, let's call it, insurance providers, private payers, where they are getting reimbursed for OverStitch, the ones being used for ESG. And certainly, that's the case today for bariatric revisions. Bariatric revisions are nearly always paid for. It's an exceedingly rare situation today when we don't have a bariatric revision using OverStitch that is being just normally paid for. So what we're really looking at is trying to expand that and using the MERIT data to expand that and to really broaden this to being more of a national coverage and part of national coverage policies. That's probably still though going to involve coding and coverage and timing around all those things such that it's unlikely to affect us in 2021. Hopefully, there could even be some benefits in 2022. But the way that most of these coding processes lay out their calendars, it's probably more of a 2023 event in our future.

[Matt Hewitt:]

Okay. Understood. All right. And then shifting to Orbera. Obviously, the CPT code news was positive when we saw that it was on the calendar. We're still waiting for that news. But maybe -- that business has -- is starting to recover even without reimbursement, per se. And as we start to think about areas where reimbursement is possible or likely, I think some of the areas you talked about as having interest are NASH -- as a treatment for NASH, for surgical procedures where maybe high BMI patient, getting them down to a fighting weight beforehand. I know that there's trials ongoing for that and for orthopedic procedures. But how do you -- help us understand, from a size perspective, like how big of a market or -- what kind of an opportunity does that represent for Orbera?

[Todd Newton:]

Yes. We -- in our Investor Relations slide deck, which is on our website, and I don't have these numbers right in front of me right now. But on that -- in that deck, we have a number of demographic data points that talk about those top 3, if you will, priority areas that we have been pursuing. It talks about the population, for example, that is in our BMI range of 30 to 40, who also are going to be those NASH patients. And so I'd just refer you there. But the size of these markets are significant. I think you'll see that the number for NASH, for example, where the fibrosis levels are 2 or 3 and their BMI is over 30, but lower than 40, so it makes it consistent with Orbera label. That's roughly a 10 million U.S. population. If you go down to the -- to those that would be eligible for using Orbera, again, BMI 30 to 40 and the number of just total joint replacements done per year, that's another 300,000 procedures that are done for those patients that are within that range of BMI and so on and so on. So these are significant markets that can make a difference for our Orbera business here in the United States.

[Matt Hewitt:]

Okay. Maybe one last one for me, and I'll hop back in the queue. Another nice improvement in gross margin in the quarter. You've taken some steps. You mentioned that you're in the process of starting the next phase of gross margin improvement projects. But as we think about fiscal '21 and not so much of guidance, but that should continue, the gross margin should continue to trend higher along with your revenues as sales continue to grow? Is that accurate?

[Stefanie Cavanaugh:]

Yes. It is. And our biggest contributor to gross margin improvement this year will be X-Tack. It has a high variable gross margin, and so that will be contributing to our gross margin improvement this year as will the 2 projects I talked about in my prepared remarks.

[Operator:]

I'd now like to turn the floor back to Todd Newton for some additional remarks.

[Todd Newton:]

Well, thank you, operator, and thank you, everyone, for joining us today. This will be my last call as CEO of Apollo. Earlier this month, we announced the appointment of Chas McKhann as CEO effective on March 1. And this is a good time for transition as great things are on the horizon. Today, we sit with a high-growth product portfolio, and each of our products are directed at high-value, large addressable markets. As I reflect back about OverStitch, this was a product originally designed for NOTES, or Natural Orifice Transluminal Endoscopic Surgery, which is a leading-edge and maybe you'd even say it's a bleeding-edge surgical concept. But no one is doing or looking to do oral appendectomies. 6 years ago, when we would engage physicians about OverStitch, their reactions would be, "Well, gee, that's a cool technology. When will I ever use it?" Since that time, we have answered that question. Today, OverStitch is emerging as the standard of care for bariatric provisions and for esophageal stent fixation in addition to various other core GI applications that call for full-thickness tissue approximation. Physicians see the enormous value potential of ESG for the obese as a primary obesity procedure. And in the months ahead, I expect us to hear more from physicians developing an OverStitch endoscopic antireflux procedure, which is today being called RAP, as a possible alternative to surgical fundoplication. We have taken down other OverStitch adoption barriers by building world-class medical education capabilities. We developed the Sx for those at locations or in markets who do not have access to a dual-channel scope. And now we are expanding the incredible versatility of suturing into the large lower GI market with X-Tack. Orbera, too, is under revival with a medical-use strategy that leverages its unique patient value proposition. Thank you to Matt Hewitt for that question of what those things look like today. And along the way, we have made some tough decisions to shed lower-performing products and programs to reach the point we are at today, a company with a clear identity. The future looks good, and we have specific plans for further improving the structural self-sufficiency of the business with very specific, well-conceived and executable gross margin improvement projects. We have dramatically reduced our cash burn, and we have probably the best ever balance sheet as a company. The business is certainly not on cruise control, and I would never say that it is, but we have a solid plan and the human and financial resources to execute it. So it's time to close the repositioning chapter and begin to write a great commercial execution chapter. I'll be supporting my transition and have every confidence in Chas, along with our executive team, to lead Apollo Endosurgery forward. Chas has an impressive track record, with a resume that includes successful commercial roles at Boston Scientific, Johnson & Johnson, Torax Medical and Intersect ENT. And lastly, to all the men and women of Apollo Endosurgery past and present over the past 6.5 years, thank you. We've come a long way, baby. Apollo Endosurgery has truly changed interventional gastrointestinal endoscopy as well as the treatment options for the many affected by the various metabolic diseases caused by obesity. And the company is poised to burn its mark even deeper. So should you have any questions or would like to arrange a call with us, please contact Matt Kreps at Darrow Associates. The company also plans to participate in several virtual investor conferences coming up ahead in the month of March. Please also contact Matt if you'd like to request a meeting as part of one of those events. Thank you, and have a good evening.

[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.