Obalon Therapeutics, Inc.
Q4 2019 Earnings Call Transcript

Published: 29 Feb 2020

[Operator:]

Good day, ladies and gentlemen. And welcome to the Obalon Therapeutics Fourth Quarter and Year-end 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded.I would now like to turn the conference over to Bill Plovanic, President and Chief Executive Officer for Obalon. Mr. Plovanic, you may begin, sir.

[Bill Plovanic:]

Thank you, operator. Good morning. And welcome to Obalon Therapeutics fourth quarter and year-end 2019 financial results conference call. With me on today's call are Bob MacDonald, Chief Retail Officer, who's responsible for driving future site expansion for the Obalon Center for Weight Loss retail treatment center model. A function that's similar to a role he played with Sono Bello, the largest aesthetic surgery chain in the United States. Also on today's call is Nooshin Hussainy, our Chief Financial Officer.This morning, the company issued a press release detailing our financial results for the three months ended September 30, 2019. This release can be accessed through the Investor Relations section of the Obalon Web site at www.obalon.com, and you can also access the webcast of this call from there.Before we get started, I'd like to remind everyone that any statements made on today's conference call that express belief, expectation, projection, forecast, anticipation or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. Forward-looking statements in this release include Obalon's expectations regarding the near and the long-term growth potential of its business, including the company-managed retail treatment centers.These forward-looking statements are based on information available to Obalon management as of today, and involve risks and uncertainties, which include but are not limited to, the risk factors disclosed in the periodic and current reports filed by the company with the SEC from time to time, including the Form 10-K for the year ended December 31, 2019. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. And listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.Obalon specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. The archived webcast will be available for one year on the company's Web site obalon.com. For the benefit of those who may be listening to the archived webcast, this call was held and recorded on February 27, 2020. And since then, Obalon may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.And with that I'll now provide an update on our business and review highlights from the recently reported quarter. We will then have Nooshin Hussainy, CFO of Obalon, provide an overview of our financials for the quarter and for the full year of 2019. I'll then provide some color on our current goals for the new retail treatment center model in order to help investors better understand the potential opportunity.Overall, I am pleased with the fourth quarter 2018 operational results and accomplishments. It was the first full quarter operations for our first company managed retail treatment center, the Obalon Center for Weight Loss. Initial results from the San Diego site provide support for our belief that we may be able to leverage the two plus years of commercial experience with our positioned customers and create a service business model in a dedicated facility, focused on weight loss programs with the Obalon balloon system.On our last call, we stated that we believe that the foundation could be laid for a standardized repeatable retail treatment center model and last week we announced opening of our second location in Orange County, California. We have also entered into a lease for another site in California, which we expect to have operational within the next quarter. And we look forward to opening additional sites this year, and we'll provide more information on our goals for 2020.Although, our primary commercial focus is on establishing the Obalon Center for Weight Loss retail treatments center strategy, we have continued to provide balloon systems to a few key high volume private practices and have signed a new one year distribution agreement with a distributor in Qatar that has experience with the Obalon balloon system. We intend to support U. S. physicians and our distributor in Qatar with a centralized model that does not require field based sales personnel. We believe this may provide the flexibility to re-enter these channels in the future if we believe it to be complementary to our Obalon branded store strategy.At this time, I'd like to describe it in more detail the Obalon Center for Weight Loss. These treatment facilities are Obalon managed and branded retail treatment centers where a patient is able to receive a comprehensive weight loss treatment experience, including six months of treatment with the Obalon balloon system and 12 months of nutritional counseling in a high end med spa like setting. The first two Obalon centers are located in California and suburbs of San Diego, in Orange County respectively, which have easy access to and for our major roads and thoroughfares. The centers are located in higher end medical buildings with other practices, such as plastic surgery, cosmetic dentistry and orthodontics. They have the look and feel of a high end medical spa.The centers are staffed to provide everything required for a patient's weight loss journey from initial interest through balloon treatment to nutritional counseling and then the scopic removal with all medical care provided by a separate professional corporation owned by a physician. Staffing at the center includes physicians who are experienced to weight loss, supported by a medical assistant to manage the medical aspects of treating a patient with the Obalon balloon system; a registered dietician to provide nutritional counseling to drive the lifestyle changes that can help create and sustain meaningful weight loss for patients; a professional office manager to oversee daily operations; and a professional experienced salesperson with an aesthetic medical background that seeks to convert initial patient interest into a treatment decision, including qualifying the patient financially. Of course, the ultimate decision to treat any patient with the Obalon balloon system is made by a physician of the professional medical corporation.After the first full quarter of operation for the Obalon branded retail center, I'm encouraged with the initial results. We have been able to successfully leverage the capabilities we developed during our initial two plus years of commercialization to stimulate consumer interest in Obalon. The majority of our marketing efforts are through direct response digital advertising, mostly Facebook and Google, utilizing our own in house organization, as we have been doing since the Obalon balloon system was first commercialized in the U. S. in January, 2017.We have also executed on print, traditional radio and digital radio advertising. Our in house call center that was established in late 2018 is converting patient interest from our marketing efforts into book consultations with our store based sales consultants. The benefits of the Obalon branded center model become more tangible as the patient moves to the full patient journey with a standardized patient experience from initial interest to treatment. Specifically, our in house call center will book a consultation for the prospective patient with a professional experienced salesperson at one of our Obalond branded retail centers. Who then discuss the non-medical aspects of the treatment and financially qualifies the patient.Once the patient is medically and financially approved, a physician from the professional medical corporation medically screens and qualifies the patient who is unable to begin the treatment program. One of the major benefits of the new branded retail treatment center model is speedy treatment. Specifically, the patients have been able to book a console purchase and complete their initial examination all in the same day with first Balloon placement the next day.We have established a set of strict metrics to measure our performance and we continually review these metrics to determine effectiveness of our marketing and patient conversion funnel, from creating initial patient interest, converting that interest to a consultation and ultimately, for patient choosing to receive treatment. As a result, we believe we’re able to accurately and quickly measure the performance of our marketing efforts, which in turn allows us to adjust our demand generation efforts based on the learnings to invest in the most efficient marketing mix. This is not something we could previously do when we were selling the balloon through more traditional physician practice channels.As part of the comprehensive treatment program currently being offered at the center, nutritional counseling is available for up to 12 months through both in person and virtual sessions with a registered dietitian and all who's at the center and also through an Obalon branded phone-based application, and the phone app also includes unlimited access to on-demand video content, including meal plans, recipes and fitness classes.While no patient has yet completed the full six months of therapy at the Obalon Center for Weight Loss, we are pleased with the initial clinical results for patients that are currently in treatment. Safety and efficacy are trending in line with what was reported in our commercial registry data, and we have not had a single device related adverse event at the Obalon Center for Weight Loss.As a reminder, we estimate that there are approximately 69 million adults in the U. S. that qualify for the Obalon balloon system’s FDA approved indication, which is a BMI, body mass index, in the range of between 30 to 40, are those that can benefit by losing approximately 30 to 100 pounds. We believe the Obalon branded retail treatment center model will improve access to care for people with obesity for our candidates for treatment with the Obalon balloon system. Overall, I'm pleased with the initial results for the first full quarter of operations in the first center, and we now have our second site operational.With the opening in the second center, we continue to gain competency we are developing a portable, replicable retail treatment center model that can be expanded into new markets. We have analyzed and identified our next potential markets for expansion, and believe that we are positioned to move quickly. We are encouraged by the initial results and trends of the first center are in the initial stages and commercialization of that second center, and we look forward to open additional sites this year.I'd now like to have Nooshin Hussainy, our Chief Financial Officer, provide a brief financial recap for the quarter ended December 31st and year.

[Nooshin Hussainy:]

Thanks Bill. Today, I would like to share details on our financial results for the fourth quarter and the year ended December 31, 2019. I will compare fourth quarter 2019 to third quarter 2019. As I believe sequential growth is while the majority of investors are most interested and given the pivot in our business model in the second quarter of 2019. I will then provide a comparison of full year 2019 versus 2018 financial figure. Lastly, I will discuss our recently announced equity line with Lincoln Park Capital.Fourth quarter revenue was reported at $786,000 compared with $333,000 in the fourth quarter of 2019. Revenues for the fourth quarter of 2019 included the first full quarters of operations from the previous treatment center models. U. S., physician customer revenues and sales to our international distributors as compared to sales on ETU as physician customers in the third quarter of 2019. In the fourth quarter, we recognized approximately $140,000 in revenue from the new retail treatment center model, but collected cash of almost $350,000, which has reflected in cash from operations.As a reminder, net revenue from the treatment center model is recognized in line with the delivery of services, while cash payment from treatment package is collected upfront by estimated delivery of services the majority often is revenue as recognized over the course of balloon placements during the first three months of treatment with a balance expected to be recognized in future quarters as a result there’s a lag between cash collection and recognized revenue.U. S. physician revenue was approximately $340,000 and sales to our international distributors contributed $600,000 to fourth quarter revenue same-store revenue in Q4 to $786,000. This compared to approximately 330,000 of sales only to U. S. physician customers in the third quarter of 2019. Cost of revenue was $626,000 in Q1 as compared to $626,000 in Q3. Gross profit for the fourth quarter of 2019 was $238,000, which was an improvement from a gross deficit of $79,000 in the third quarter of 2019. Increased volume and absorption of overhead contributed to the sequential improvement in gross profits.Research and development expense for the fourth quarter of 2019 totaled at approximately $1,500,000 compared to $1,200,000 in the third quarter of 2019. Increased enrollment and the post approval of study prior to our original FDA approval drove the sequential increase. Furthermore, we continue to make investments to support improvements of our recently approved Obalon Navigation System and Obalon Touch Dispenser as well as continued development of our new product pipeline.Sales and the general administration expense for the fourth quarter totaled $3,643,000, up from $2,489,000 in the third quarter of 2019. And increase in D&O liability insurance rates, marketing expenses for the San Diego Obalon Center of Weight Loss, legal and other onetime expenses contributed to the sequential increase. The operating loss for the quarter was approximately $5 million, which was up to $3,663,000 in the Q3 2019.Net loss for the fourth quarter of 2019 was approximately $4,900,000 or $0.64 per share based on 7,700,000 weighted diluted average common shares outstanding as compared to a net loss of approximately $3,700,000 or $0.61 per share based on 6,100,000 weighted diluted average common shares outstanding for the third quarter of 2019.Full year 2019 revenue was reported at approximately $3,300,000 as compared to $9,100,000 for the first year of 2018. U. S. revenue of $2,400,000 increased from $4,700,000 international revenue of $1 million in 2019 compared to $4,400,000 of international revenues in 2018.Gross profit for the full year of 2019 was $331,000, resulting in a gross margin of 10% as compared to approximately $3,700,000 for the first quarter of 2018 and a gross margin of 40%. Research and development expense totaled to approximately $6,900,000 for the full year of 2019 as compared to $10,700,000 for the full year of 2018. Selling, general and administrative expenses decreased to approximately $16,700,000 for the full year of 2019 as compared to $29,900,000 for the full year of 2018.Operating loss for the full year of 2019 was approximately $23,200,000 compared to an operating loss of $37 million for the full year of 2018. Net loss was reported at $23,700,000 for the full year of 2019 compared to a net loss of $37,400,000 for the full year of 2018. The net loss per share was $5.03 for the full year of 2019 as compared to the net loss per share of $19.64 for the full year of 2018.Lastly, I would like to touch on our recent financing agreement with Lincoln Park Capital, which could enable us to access up to $16 million over the next 36 months. The intention for this agreement is to help fund expansion of our retail treatment center model.We have filed an S-1 as part of this agreement and expected to go effective next month. It's important to note that the equity line with Lincoln Park would provide us the ability to sell shares of our common stock at purchase price that are based on prevailing market base. It does not include warrants, derivatives, financials, or business covenants and provide us the flexibility to this capital opportunistically and cost effectively. Most importantly, Obalon is not obligated to sell shares to Lincoln Park but has the ability to at our discretion subject to various conditions. As a reminder, we ended Q4, 2019 with which $14,900,000 cash and cash equivalents and short term investments and no debt.And with that, my comments are complete. And I will turn the call back to Bill.

[Bill Plovanic:]

I would now like to share our goals with you to provide a better understanding of how we measure the business internally. As for expansion plans for the number of Obalon branded retail treatment centers, our current goal is to have between five and eight sites operational by the end of this year. We currently have two sites operational and have a signed lease for an additional site, which we are targeting to have operational within the next four months.In terms of patient flow per center, our goal is an average of 15 to 30 new patients per month after initial ramp up period of a few months. The 15 to 30 average new patients sold month at steady state is equivalent to the performance that was experienced at our top accounts, top sites last month. For patient pricing, our current goal is to achieve average net revenue recognized per patient in a range of 5,000 to $6,000 over the term of the patient treatment, which is currently 12 months.As Nooshin noted in her comments, revenue from the treatment center model are recognized in line with delivery of services, while full payment for the treatment package is collected prior to delivery of services, creating the lag between new patient sales and recognize revenue. The fourth quarter 2019 was an important quarter for Obalon. It was the first full quarter of operation for our first company managed retail treatment center and initial results from that San Diego site continue to support our belief that we may be able to leverage our two plus years of commercial experience in the U. S. and create a service business model in a dedicated facility focused solely on a weight loss treatment program with the Obalon balloon system.With the opening of the second location in Orange County, California this month, we believe the foundation has been laid for a standardized repeatable retail treatment center model. We look forward to opening additional sites and improve access to care for an estimated 69 million adults with obesity in United States that are candidates for treatment with the Obalon balloon system.With that, our prepared comments are complete. Operator, will you please now open the line for questions?

[Operator:]

[Operator Instructions] And your first question comes from the line of Kyle Rose with Canaccord.

[Kyle Rose:]

So I wanted to see if we can just get a little more information regarding the treatment centers, particularly just the overall experience thus far. How are you seeing patient conversion rates now that you control the whole, I guess, patient experience from the marketing to the actual delivery. Have you seen the improvements in the conversion rates that you were expecting? And then any insights just as far as what you've learned at the first center that are maybe going to change or improve potential productivity at centers two, three and then eventually five to eight?

[Bill Plovanic:]

In terms of the marketing, as we mentioned, we're taking the capabilities we had and leveraging those and including our marketing abilities and advertising and our call center, to create that lead generation. And then we generate those leads that are the booked appointments with our call center transfers or converts into booked appointments at the treatment center. So we’re -- and then once they show up to the treatment centers, then our salesperson has the opportunity to convert that person into a sole patient and if somebody to go through treatment.So we are measuring and analyzing all the layers of that lead generation funnel, and have the ability and the granularity to go back all the way to the initial advertising that's utilized to drive that lead. So as we look at that from lead generation, to reaching out to them, to booking the consoles, to people that show up and then convert into a sale, we've been very pleased with that. We measure all that, analyze it and are looking to pull levers at which to improve different areas of that funnel. We have been very pleased in our meeting or exceeding our goals in several of those metrics, and looking to optimize that all throughout the process.In terms of the patient experience and the learnings, obviously we got the first center up and going at the end of September, and then we took those learnings to apply it to the second center and very encouraged by the initial results at second test center in terms of not just from the marketing standpoint of turning that on and driving the leads and the conversion at that second center, but also from an operational standpoint. And I think from our standpoint, started out with a model and we continue to execute on that model, and are very, very encouraged and pleased with what those results are. I would say very minor changes to what we're doing, nothing significant that we have come across at this point.

[Kyle Rose:]

And then this is the first quarter that you reengaged your revenues from the international markets. Can you just maybe -- your goals are pretty clear in the United States. Just help us understand how we should think about that OUS line on a go forward basis. Was that an initial stocking order and then we should expect it to pull back? Or is that kind of a consistent steady as she goes number that we should contemplate moving forward?

[Bill Plovanic:]

As you think of our international distributors, as I said, our primary focus is the Obalon Center for Weight Loss in the U. S. We do continue to provide the balloon systems to a few key physicians high volume in the U. S. and also our international distributor now in Qatar. This was a distributor that was very familiar with the Obalon balloon system and had been distributing it in that country, and had a demand for us to continue to supply the new generation of product. I think as we think of that business, we’ve signed a one year agreement. It's a pretty straightforward agreement. I mean, the revenue should be very similar on a quarter but it maybe a little less as we go each quarter from the current one, but it won't be significantly different.

[Operator:]

Your next question comes from Ryan Zimmerman with BTIG.

[Ryan Zimmerman:]

So I want to just ask, I think I heard this correctly, but I apologize. Nooshin, you said of the total revenue, I think there was about $340,000 in physician revenue and kind of those high volume accounts, and $300,000 from your international distributor. So if we back that out and plus the revenue that is still yet to be recognized. Can you just help us understand where that puts the center at? And more so the bigger question is from a productivity standpoint that I think would imply similar to so the message you gave out Bill. But how do you feel about the capacity of the centers today and what you saw this quarter, and what it could ultimately translate to overtime as you scale?

[Nooshin Hussainy:]

So do you mind to repeat the last part of the question for me because I didn’t hear it clearly?

[Ryan Zimmerman:]

So my question was just specifically the components of revenue. What does the incentive revenue look like when you net out high volume physician accounts? And as you think about that from a capacity standpoint, where can that go? Are you feeling -- just based on the metrics you provided that it seems like that would be in line with kind of where you expect it to go, but do you have capacity for much more patients over time in a different center?

[Bill Plovanic:]

Ryan, I'll answer the second part of the question see if -- and then handed over to the Nooshin for the first part. But then in the second part of the question, it's really -- you're asking a capacity question and the way to think about capacity is at this current time, we believe there's -- peak capacity is beyond our current monthly new patient goals that we provided. Remember it's approximately 15 minutes for delivery of a balloon, and our staffing model is variable with medical delivery. So we're able to titrate or optimize the staffing of the medical to meet demand, but we're currently not maximizing the office hours. And we do have office hours, are currently only five days a week, eight hours a day basically. So we could be able to adjust that to support additional demand if needed.I think in terms of the revenue you're asking, Nooshin had mentioned or stated the about the 140,000 was recognized, and there is a lag between the revenue collected upfront and the net recognized revenue over time, because of delivery of services and the cash flow from operations from that recognized revenue was approximately $350,000. So the net revenue would be collected overtime as the delivery of services.

[Ryan Zimmerman:]

And then the pricing, when I think back to when you were selling, just say the balloons direct to a physician and what the end consumer pricing is, it was a little higher and now you're doing patient pricing in that $5,000 to $6,000 range. What impact have you seen if any from that as you think about kind of the right way to price it?

[Bill Plovanic:]

In terms of patient pricing, I mean we've seen our physician customers on average price between $6,000 and $8,000 or $6,000 to $9,000 with an average of about $8,000 across the U. S. Our more high volume physician customers tended to price towards below the midpoint and towards the bottom end of that range. So when they were --- we said our goals are to meet or exceed the volumes of what our high volume customers were doing on a monthly basis at their best months, best sites. And so we're looking to drive that volume level, so that's what our goal is.

[Operator:]

And your next question comes from Ben Haynor with Alliance Global Partners.

[Ben Haynor:]

It looks to me like you've started couple of different marketing strategies in terms of offering rebates for certain amount of weight loss and such to patients to attract people so far. Is there anything that you've learned or anything that you can share on that, and do you feel like you have something that's kind of locked in now it’d be hard to do better than that or anything you can share on that front?

[Bill Plovanic:]

Remember when our physician customers, there were different promotional programs of our physician customers, we utilized it. We were providing outlines for as they were driving patient flow into their physician practices. We've leveraged those learnings into the programs we're doing now. There have been different incentive programs available since September. The overall intent of these programs is to drive that patient interest and conversion, and we're looking at different points in the lead to treatment conversion funnel and looking to optimize. So we continue to take those learnings from the different programs that are run and leverage those learnings into the next program.

[Ben Haynor:]

And then just looking at the two stores that you’ve opened now are located, is that kind of what we expect in the future in terms of as you branch out kind of in terms of population centers, or is there anything you can share on that front?

[Bob MacDonald:]

So our growth strategy is predicated on the fact that approximately one third of the U. S. population is between 30 and 40 BMI. So there's a huge market out there. Obviously, being located in San Diego, we thought it made sense to open our first center here locally. And then as Bill had mentioned, we have a second center now open in Orange County. So as we spread out, we want to balance the need not to travel too far along with addressing those large markets where most of the people are. So we're very optimistic that there's a big, a huge opportunity out there and we'll proceed accordingly.

[Ben Haynor:]

So it's kind of like being in and out burger model, not get too far from S curves?

[Bob MacDonald:]

You could phrase it that way, yes.

[Bill Plovanic:]

And I think, Ben, if you look at it there's a lot of examples out there, you can take a top down approach, a bottoms up approach. But we look at the different geographies, the population income and then several other different layers that we filter through it. We analyze that data. We've looked at similar players in the space as well. You can look at where clear choices of bodily hair restoration at Sono Bello, and just gives you an idea. But looking at it at this point, we still believe that the NFL City strategy is really the way to go, given the prevalence of obesity and the target market that were indicated for, it’s really looking at those larger city populations that you can move into. And I think the other thing, Ben, is leveraging the physician corporation we have in place and all the assets we have put together for the first sight makes a lot of sense as well.

[Operator:]

[Operator Instructions] We have no questions in queue. Do you have any closing remarks?

[Bill Plovanic:]

Just like to thank everybody for joining the call today. And we look forward to our next call. Thank you very much. Have a good day.

[Operator:]

This does conclude today's conference call. You may now disconnect.