Apollo Endosurgery, Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day, and welcome to the Apollo Endosurgery First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nick Laudico of The Ruth Group. Please go ahead sir.

[Nick Laudico:]

Thanks, operator, and thanks, everyone, for participating in today's call. Joining in for the company are Todd Newton, Chief Executive Officer; and Stefanie Cavanaugh, Chief Financial Officer. Before we begin, I would 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 for timing of product development and sales. These forward-looking statements involve material risks and uncertainties that Apollo's actual results may differ materially. For a discussion of Risk Factors, I encourage you to review the Form 10-K filed on March 24, 2017, and subsequent reports filed with Securities and Exchange Commission. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 4, 2017. 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. During this conference call, we will be discussing certain non-GAAP financial measures, including adjusted U.S. endo-bariatric product sales revenues. While we believe this information to be helpful on understanding Apollo's financial performance, it is not meant to be considered in isolation or as a substitute for the comparable GAAP metric. These measures should only be read in conjunction with Apollo's intent to consolidate financial statements prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures to the GAAP measures can be found in today's press release which was posted - will be posted on our website and has been furnished today to the SEC on Form 8-K. With that said, I'd like to turn this call over to Todd.

[Todd Newton:]

Thank you, Nick, and good morning, everyone. On today's call, I'll provide some introductory comments on our first quarter, and Stefanie will then follow with further detail on the quarterly results. Overall we are very pleased with Q1 results as they were largely consistent with our internal goals and expectations. Total revenue in the first quarter of 2017 was $14.6 million, which was split evenly between our endo-bariatric and surgical product sales. From the beginning of our introduction of ORBERA in the U.S. market, our strategy was to quickly deliver a high-quality physician education program and through it build a large scale customer base throughout the United States. We were tremendously successful in this effort, and through the end of 2016, had trained more than 800 physicians on the safe and effective use of ORBERA. In connection with our ORBERA educational training, we required that physicians make a starter kit purchase, which was a demonstration of commitment on their part and provided them with 10 balloons for their initial cases. This starter kit program also was very successful and served us well in the first quarter of 2016, which was a very active training quarter as we shipped and recorded $2.1 million in starter kit sales in that quarter. In the first quarter of 2017, medical education continued to be a major point of emphasis at Apollo and we are still training new users and selling associated starter kits in this quarter. But our main effort in the ongoing U.S. ORBERA launch now is the next phase of ORBERA's market development, that is increasing patient education and other efforts to help existing ORBERA trained doctors to achieve greater ORBERA utilization. Starter kit sales were still $300,000 this quarter and our number of trained U.S. physicians on ORBERA increased to 850 doctors as of the end of the first quarter. We had anticipated the starter kit sales would create a difficult comparative period from the financial reporting perspective for our U.S. endo-bariatric business this quarter. Adjusted U.S. endo-bariatric product sales, which excludes these first time initial starter kit sales in each quarterly period, increased by 31% and our customers reported approximately 1,200 ORBERA patient placements in the United States during Q1. The other product in our endo-bariatric portfolio, OverStitch, continues to also be a source of sales growth for Apollo both in the U.S. and outside the U.S. in Q1. Physician interest is particularly building on using OverStitch to perform the endoscopic sleeve gastroplasty procedure, otherwise referred to as ESG. This is still a very new procedure, with around 10 active U.S. physicians performing ESG entering 2017 and another 10 having completed their first cases during the first quarter. These physicians represent approximately a 50-50 GI and surgeon mix. Outside of the United States, ESG adoption is also on the rise, with more than 20 active physicians entering the year and another 10 having now completed their first cases. Outside the United States, the current physician mix is approximately two-thirds GI and one-third surgeon performing this procedure. In our year-end earnings call, we reported on the very first published 24-month follow-up of patients who had undergone the ESG procedure. This was a single center study which recorded total body weight loss of 20.9% on average as of the 24-month follow-up mark. Since that time, a multi-center study of 248 patients, of which 92 patients had reached 24-month follow-up, was published in the May edition of Obesity Surgery. Three centers cooperated in this study, two in the U.S., one in Europe, and all centers reported statistically consistent results and the average 24-month total body weight loss was 18.6%, a very good result. For OverStitch, physician education is also an important part of our strategy to increase its adoption. In the U.S., we launched our Mobile Learning Center in Q1 to further expand our ability to train physicians at flexible times and locations around the country. The Mobile Training Center also allows us to offer training to extended members of the physician's team so as to enhance the ability of these practices to efficiently integrate our technologies. We trained a total of 185 physicians on OverStitch during the first quarter. This included more than 160 physicians in more than 70 members of their staff trained on our Mobile Learning Center. Additionally we trained more than 20 physicians at traditional brick-and-mortar venues. So before I turn it over to Stefanie, let me say a few words about our surgical sales in the quarter. In the first quarter, our surgical sales decrease was 11%, which is definitely trending in the right direction for us. In the United States, our surgical sales decline was 18% in the first quarter, or half of the decline rate we experienced in this market during calendar year 2016. Outside the United States, surgical sales increased 5% compared to the first quarter of last year primarily on higher sales to distributor markets and sales in our European direct markets. We gained market share this quarter and also benefited from the exit from the market by gastric banding competitor to LAP-BAND. While we are pleased with the improving trends in our surgical sales in the international growth during the first quarter, we remain cautious at predicting win and at what level, our surgical product sales will ultimately stabilize. And now, I will turn it over to Stefanie for her review of our Q1 financial results.

[Stefanie Cavanaugh:]

Thank you, Todd, and good morning, everyone. Total revenues for the first quarter of 2017, was $14.6 million, a decrease of 10% year-over-year. Our revenue trend reflected an improving but still expected decline in surgical product sales due to declines in gastric banding procedures, along with anticipated lower levels of ORBERA starter kit sales in the United States due to progression of our ORBERA product launch activities since the first quarter 2016. Total endo-bariatric sales in the first quarter of 2017, was $7.3 million, a decrease of 11% from the first quarter of 2016. As Todd mentioned, U.S. ORBERA starter kit sales were $2.1 million in the first quarter of 2016, associated with the success of our initial physician training phase [ph] of the ORBERA product launch last year. Starter kit sales will continue to affect the comparability of our U.S. endo-bariatric sales results over the course of 2017, particularly during the first half of the year. Adjusted U.S. endo-bariatric product sales, which excludes the ORBERA starter kit, increased 31% from $2.4 million in the first quarter of 2016 to $3.2 million in the first quarter of 2017. Outside of the U.S., sales of our endo-bariatric products increased 5% in Q1 2017. OverStitch sales doubled compared to the prior year, while for ORBERA, which is a far more mature product in international markets, we had lower sales to distributor markets due to order timing along with softer direct market sales in Europe and Brazil. Surgical sales in the first quarter 2017 were $7.1 million, a decrease of 11% compared to the same period in the prior year. As previously discussed, this decline was expected and due to lower gastric banding procedure volumes, and as Todd pointed out, the rate of decline this quarter is substantially improved over what we experienced in 2016, which is an encouraging sign. Moving down to P&L. Gross margin in the first quarter of 2017 was 65% compared to 70% for the first quarter 2016. The decline in gross margin was primarily a result of a shift in our product sales mix. Further higher overhead cost in Costa Rica, than that charged to us by our previous third-party supplier, was also a factor. As our revenue continues to shift between our product portfolios, our gross margin will likely experience some intervening pressure. That said, we have cost improvement programs for all of our endo-bariatric products that we are planning to implement over the next two to three years. On the expenses side, total operating expenses were $16.3 million for the first quarter 2017, compared to $14.4 million for the first quarter 2016. The increase is primarily due to higher legal costs included in general and administrative expenses, associated with being a public company, including approximately $1.4 million of elevated expenses associated with initial filings and other public company activities that are not expected to repeat each quarter. Research and development expenses also increased due to activities to improve supplier reliability of the OverStitch product. Interest expense was $1.5 million for the first quarter 2017 compared to $2.8 million for the first quarter 2016. The decrease is due to the elimination of non-cash interest of $1.2 million associated with the convertible notes that converted to equity in December 2016. In summary, our net loss for the first quarter 2017 was $8.2 million compared to $6 million for the first quarter 2016. The increase in net loss over the prior year was due to two factors. First, the lower gross margin, resulting from our shift in revenue mix from surgical product sales to endo-bariatric product sales, and second, the higher cost of meeting our initial public company filing requirements. These were partially offset by lower interest expense in the quarter. We ended the first quarter 2017 with cash, cash equivalents and restricted cash of $9.2 million. The decrease in cash, cash equivalents and restricted cash from $20 million as of December 31, 2016, includes a $7 million principal repayment on the company's senior secured credit facilities, which was made as part of an amendment to the terms of our credit agreement. This amendment also eliminated the $8 million minimum cash requirements and reduced certain financial covenants. The decrease in cash, cash equivalents and restricted cash in the first quarter also reflected some one-time G&A expenses, as previously discussed. Excluding these one-time G&A expenses and the $7 million debt pay down, our decrease in cash in the first quarter would have been approximately $2.5 million. With that, I'll hand it back to Todd.

[Todd Newton:]

Thank you, Stefanie. In closing, we had a positive start to 2017, highlighted by ongoing market development for endo-bariatric products and a moderating decline in our surgical business. The key metrics for ORBERA and OverStitch continue to be a positive curve and our team is focused on programs that we think support greater product use, as existing accounts, while we leverage our investment in medical education and continue training new physician users on our endo-bariatric products, and we are delivering these medical education capabilities in more effective and innovative ways, such as through our Mobile Training Center. In April, we received all remaining regulatory approvals needed for OverStitch to be launched in the Brazilian market. We have a direct sales team covering Brazil and plan to begin selling OverStitch in this market in Q3. Brazil is a good market for us, especially for ORBERA and we think OverStitch will do well in that market also. This weekend and early next week, Apollo will be at the Digestive Disease Week Annual Conference in Chicago, otherwise called DDW. DDW is the world's largest gathering of physicians, researchers in the industry in the fields of gastroenterology, endoscopy and gastrointestinal surgery, and thus one of the big meetings of the year for our company. During DDW this year, over 35 clinical abstracts will be presented on OverStitch and ORBERA. This includes presentations on the ESG procedure and a broad range of current and future procedures that use OverStitch. For ORBERA, the presentations will include a variety of clinical experiences from various geographies. Our mobile lab will also be in Chicago and we will be supporting a number of learning and training opportunities during DDW. For reasons of time, we'll not be having a Q&A session this morning. However we look forward to updating you on our progress on future conference calls and investor conferences, including the JMP Healthcare Conference in June. If you have any questions after this call, we are available in the coming days and weeks, so please reach out to The Ruth Group, as listed on our press release today to coordinate any follow up. Thank you everyone for joining the call today.

[Operator:]

Thank you for your participation. That does conclude today's call. You may now disconnect. Question-and-Answer Session