Obalon Therapeutics, Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Obalon Therapeutics’ First Quarter 2018 Financial Results Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Bill Plovanic, Chief Financial Officer of Obalon. You may begin.

[William Plovanic:]

Thank you. Good afternoon and welcome to Obalon Therapeutics’ first quarter 2018 financial results conference call. With me on today’s call is, Andy Rasdal, Chief Executive Officer of Obalon. This afternoon, the company issued a press release detailing financial results for the three months ended March 31, 2018. This release can be accessed through the Investor Relations section of the Obalon website at obalon.com. 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 expresses belief, expectation, projection, forecast, anticipation or intent regarding future events and the company’s future performance maybe considered forward-looking statements as defined by the Private Securities Litigation Reform Act. Forward-looking statements in this release include Obalon’s financial guidance for the full-year 2018 and its expectations regarding the near and long-term growth potential of its business. These forward-looking statements are based on information available to Obalon management as of today and involves risks and uncertainties, which include, but are not limited to, the risk factors disclosed in the periodic and current reports by the company filed with the SEC from time-to-time including the Form 10-Q for the quarter ended March 31, 2018. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. 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 website, obalon.com. For the benefit of those who may be listening to the archived webcast, this call was held and recorded on May 10, 2018, 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 turn the call over to Obalon’s CEO, Andy Rasdal.

[Andrew Rasdal:]

Thanks, Bill. Good afternoon, everyone. Thank you for joining us today. On this call, I will discuss highlights of our commercial progress, product and clinical performance in our new product pipeline. Following that, Bill will then review our first quarter financial results, some of the specific underlying business issues and our thoughts about future financings. We’ll then briefly answer your questions. In the first quarter of 2018, we continued the second-half of our New Year’s resolution promotion strategy with an increased focus on driving utilization of the account level. Although first quarter revenues were slower than Q4 2017, we are very pleased with the underlying metrics related to creating a sustainable business model. Based upon our commercial registry for Q1 2018, the number of accounts treating was the highest ever and grew approximately 40% over Q4 2017 and about 300% over Q1 2017. The number of new patients treated was the highest ever and grew more than 60% over Q4 2017 and more than 240% over Q1 2018. Unique visitors to our website were the highest ever and grew more than 70% over Q4 2017 and over 260% over Q1 2017. Find-A-Doctor searches were also the highest ever and grew 55% over Q4 2017 and over 600% over Q1 2017. And finally, new patient leads to physicians from our efforts were the highest ever and grew 17% over Q4 2017. We believe that our increased focus on account utilization in Q1 2018, especially the increased number of patient treatments could have resulted in over 70% of the inventory sold in Q4 2017 as part of the New Year’s resolution promotion being consumed or committed by accounts are treated in Q1, excluding those accounts who may have purchased a starter kit, but did not yet treat a patient. We believe that increased focus in promotion also helped us to create a number of successful experiences for accounts and we now have examples of strong economic success in accounts. Our top Bariatric Surgery practice offers the Obalon balloon at several sites, but has one primary treatment site that we estimate generated more than 500,000 in practice revenues related to using the Obalon balloon in Q1, which would annualize to more than $2 million of practice revenues. Our top Aesthetic practice treats at three sites that we estimate generated almost $1 million in practice revenues related to using the Obalon balloon in Q1, which could annualize to almost $4 million. Although these represent our top performers. We believe we are beginning to demonstrate the strong economic outcomes available to those practice that commit to therapy with the Obalon balloon. It’s hard to point to the precise reasons that Q1 revenue declined from Q4 2017. However, starter kit sales to new accounts were down from both Q4 2017 and Q1 2017. We don’t know, for sure, if the New Year’s resolution program emptied the new account funnel and we have to rebuild it or there’s something more organic raising new barriers as we expand deeper in the market roll out beyond the early adopters. In Q2, we have launched a new starter kit promotion, intended to address some of the new objections we’ve learned in Q1 and are hopeful that those efforts will reignite sales to new accounts by the end of Q2. However, we have seen reorder kit sales accelerate compared to Q1 2018 and reorder kit sales in the month of April alone exceeded reorder kit’s sales for all of Q1. The disruption in Q1 due to the failed financing transaction, the whistleblower complaint and lower stock prices greater than we anticipated, you had an impact on morale and confidence. The most disruption occurred in our sales and marketing organizations and we’ve accepted the resignation of our VP of Marketing and VP of sales. As we announced earlier this week, we’re very pleased to have Todd Wood join us as the new VP of Global Sales. Todd is deeply experienced and I believe will provide strong leadership and stability to our deal team and help us to implement our sales force expansion. With Kelly Huang, our COO’s strong background in Aesthetic cash-pay marketing. I’m comfortable with the manner, which Kelly has been effectively managing marketing. However, we are in the process of hiring a new VP of Marketing. We continue to be very pleased with our product and clinical performance. Even with the highest, broadest level usage of any quarter yet, we did not see higher rates of product failures or serious clinical events. In our last call, we shared data from the first 198 patients at 35 centers in our registry database to complete therapy. The group of patients within our labeled range of 30 to 40 BMI that would have been included as completers in our pivotal trial analysis, patients with three balloons completing, at least, 22 weeks of therapy showed mean weight loss of 21.8 pounds and 10% over their initial bodyweight or TBL. The upper 25% of that completed group showed weight loss of, at least, 30.1 pounds and 14.5% TBL mean weight loss of 35.6 pounds and 16.1% TBL and a maximum loss reported of 56 pounds and 25.5% TBL. The rate of reported serious adverse events in all 198 patients was only 0.5%. The rate of non-serious events was 22.2%, and vomiting was only reported in 3%. Currently, the results from all patients on our registry remained mostly consistent with their data. Two of our treating physicians have submitted a larger group of registry data for presentation at ASMBS this fall. We continue to believe that the introduction of new products will help drive market development and adoption. We’re making progress in R&D pipeline, specifically on our navigation system, which is intended to eliminate the need for x-ray during balloon placement and an early touch inflation dispenser, which is intended to be easier to use than our current inflation dispenser and to improve safety and reliability of balloon inflation. Specifically, we are collecting the data to answer the FDA questions we received in the major deficiency letter. So that we submit a thorough and timely response, including clinical usage on both navigation and touch. We have placed more than 100 balloons to date with the most updated version of navigation and touch without any failure of either product. We have used the time period resulting from the major deficiency letter to implement additional improvements and feature to the navigation and touch systems, which we believe are contributing to the strong performance thus far. Feedback from the physicians whom have used the navigation and touch system has been very favorable. We continue to believe that navigation and touch bring improvements to safety, ease-of-use and economics that may accelerate market development. Although it is very difficult to predict the timing for an FDA decision on navigation and touch, we are driving our efforts internally towards receiving a decision sometime in Q1 2019. Finally, Sono Bello has completed their initial evaluation at a few sites, and I believe, both of us are very encouraged by the results. We’re certainly very impressed by their business model, especially as it relates to patient acquisition. We have recently finalized a longer-term agreement with Sono Bello to begin expanding to their other centers throughout the U.S. As you may recall, Sono Bello has more than 40 centers throughout the U.S. with more than 100 board-certified plastic surgeons. Although it would be up to Sono Bello to determine the rate of expansion and ultimately, create the success within each center we are very excited to be moving forward with them. I would now like to hand the call over to Bill Plovanic, Obalon CFO.

[William Plovanic:]

Thanks, Andy. Today, I’d like to share details on our financial results for the first quarter ended March 31, 2018. As a reminder, we began U.S. commercialization in January 2017, and in the third quarter of 2017, we began shipping our current generation six-month product to our Middle East distributor. My following commentary will compare Q1 2018 to Q1 2017 financial results, as we’re entering our second year of U.S. commercialization, and therefore, now have year-over-year comparables. First quarter revenue was reported at $1.3 million, compared with $1.5 million for the first quarter of 2017. U.S. revenues of 500,000 were down compared with $1.5 million in Q1 2017. U.S. starter kit sales were down significantly from Q1 2017. In Q1 2018, we sold 17 new accounts, as compared to 50 in Q1 2017. As a reminder, our U.S. field force had a running start into our first quarter of U.S. commercialization in the first quarter of 2017, as USFDA approval was granted in September 2016. The U.S. field force began engaging physician customers in November 2016, but first shipments did not occur until January 2017. Also,impacting starter kit revenues, our Q1 2018 promotions included an option with a smaller upfront commitment from the physician reducing the amount of revenue per new account. Alternatively, reorders from existing accounts were up year-over-year and comprised 60% of first quarter U.S. revenues and for the second consecutive quarter exceeded sales from starter kits at 40% of revenues. International sales were $849,000 in Q1 2018, as compared to zero in Q1 2017. As a reminder, we began shipping our current generation six-month duration product to our Middle East distributor in the third quarter of 2017. We continue to believe our greatest opportunity for creating values meaningfully executing in the U.S. and we plan to continue to make the U.S. our highest priority for 2018 and beyond. Cost of revenue was your $0.8 million in Q1 2018, as compared to $0.8 million in the first quarter of 2017. Gross profit was $0.6 million in both the first quarter 2018 and the first quarter 2017. Gross margins were down slightly year-over-year to 43% from 44%. Gross margin was lower due to an overall lower ASP as we had a higher mix of OUS business, as compared to the year ago quarter R&D expense for the fourth quarter totaled $2.6 million, which was up slightly from $2.4 million of R&D expense in the first quarter of 2017. We have continued to make investments to support development of our new product pipeline primarily intended to make the Obalon balloon system easier to use more convenient and more economically attractive to help expand our overall market opportunity. SG&A expense for the first quarter 2018 totaled $10 million, up from $5.9 million in the first quarter of 2017. In Q1 2018, we incentivized our field force to drive patient treatments, existing accounts and first patient treatment in new accounts. As Andy mentioned, these incentives were successful with new accounts treating first patients, increasing 40% sequentially and new patient starts increasing more than 60% sequentially. As a result, variable compensation was high compared to generated revenues. In addition, there was approximately $1.3 million of expense associated with the terminated follow-on and whistleblower investigation that were incurred in the first quarter of 2018. Operating loss for the first quarter was $12.1 million, as compared to $7.7 million in the first quarter of 2017. Net loss for the first quarter of 2018 was $12.1 million, or $0.71 per weighted diluted average common share outstanding, as compared to $7.7 million, or $0.47 in the first quarter of 2017. We ended March 31 2018 with $33.5 million in cash and equivalents and $10 million of debt. Our top priority for use of cash is to support our U.S. commercialization efforts, as well as continued investment in our new product pipeline. In terms of guidance and metrics, there’s no change to our annual global revenue guidance for 2018 for a range of $14 million to $18 million. For the U.S., we are targeting revenue in the range of $12 million to $16 million, and for international, we are targeting revenue in the range of $2 million to $4 million. At this time, I would like to provide certain underlying business metrics for Q1 2018 that we use internally to analyze the business. The percent of U.S. revenues to total revenues in Q1 2018 was 37%, that compared to 100% in Q1 2017 and 78% in Q4 of 2017. The number of net starter kit sales in Q1 2018 was 17, as compared to 50 in Q1 2017 and 55 in Q4 2017. The percentage of total U.S. revenues for reorder kits was 60% in Q1 2018, as compared to 11% in Q1 2017 and 57% in Q4 2017. The percent change in new patient starts was more than 60% Q1 2018 over Q4 2017 and 240%, as compared to Q1 2017. I know that after a terminated transaction in January, many investors are wondering about our plans for future capital raise. We continue to believe the underlying business metrics are strong and even improved in Q1 2018. As a result, we would still like to accelerate our commercial efforts and expand our commercial footprint, including expanding the sales force, providing enhanced marketing support and increasing our manufacturing capabilities. We continue to explore various options for additional financing, including public and private investments of debt or equity. Our intent would be to fund the company at a timely manner. The best balance is the company’s desire to accelerate commercialization with shareholder interest. With that, my comments are complete. Operator, will you please now open the line for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Rick Wise with Stifel. Your line is open.

[Rick Wise:]

Good afternoon, Andy and Bill. Maybe just you give us a lot of information and I’m going to need to absorb it. But, Andy, maybe just to help us in a more detailed way understand the fourth quarter stocking and related 70% and I’m going to mix up the words, maybe the reduction in inventory in the fourth quarter. Where are we now? And I guess, we should assume that the second quarter will get on a more normal balance or help us think through all that?. And I’m sorry for the confused question, I’m more confused.

[William Plovanic:]

Well, I’m pleased that you felt like you got a lot of information and detail. I have to go back and go through your notes. I think, if any of these things are ever linear, I’m not sure that if can agree that Q2 will be back to a more normalized basis. We’re going to continue to, at least, in terms of revenue. The most important thing to us is continue to drive the underlying business metrics. And that is that, we continue to get more accounts, treating accounts or treating more patients per time period and more patients get treated and I think that’s how we grow the business. So overall, we’re pleased with that. If we look at the New Year’s promotion is sort of being a two part. The first of people get in, invest and committed, did a good job in Q4 of that. And then the focus was on making sure that they utilize the inventory that was actually not just stocking that was indeed utilization. And so, in the most simplistic terms. if you take the accounts that treated look at the number of patients. So that were got their first, second or third balloons were either used or committed for that period. That would have used up a little bit over 75% of the inventory that they bought as part of that promotion. So I think, it’s exactly we didn’t want to happen was that, there was a stocking that occurred and yet not utilization. So I think, we have sales in and good utilization through that first quarter.

[Rick Wise:]

Okay. And. Maybe talk about the April reorder rates as well. I mean, it sounds like the 60% year-over-year reorder rate. Is that what you would have expected, Andy, better than you would have thought? I mean, obviously, we’re into May now. Is that – are you seeing that continue? And again, just on most basic level, should we read that as – I’m inclined to read that as an indication of interest, adoption, utilization whatever words you want to think about. That’s right when you think about it?

[William Plovanic:]

Yes, actually, Rick, I’ll answer. So with 60% of our rev U.S. revenues were reorder business in the first quarter. And what we’ve seen is, as we talked about, as we even moved into April that reorder business was very strong in the month of April and actually, the dollar amount exceeded what we saw in the whole first quarter. So the accounts have used the inventory and now they’re reordering to continue to treat patients and support those patient treatment. So it shows you the underlying business is very healthy from that standpoint.

[Rick Wise:]

Yes. And, Bill, just last for me for now. The 14 to 18 guidance range and you’re sort of basically reiterating it. Is this for any particular reason sort of more skewed to the – later in the year than you might have thought three months ago, now we should sort of thinking about this more ratably over the next few quarters. How would you have us think about that? Thanks, guys.

[William Plovanic:]

Yes, I think, we’ve looked at the guidance and we’ve guided that 14 to 18 for the whole year with 12 to 16 in the U.S. and 2 to 4 OUS. And at this time, we still believe that the revenues will be in that range.

[Operator:]

Okay. Thank you. And our next question comes from Ryan Zimmerman with BTIG. Your line is open.

[Ryan Zimmerman:]

Great. Thanks for taking the question. So I just want to touch, you’ve had some turnover, it sounds like in the first quarter. Was any of the impact with the head – the change in the head of sales? Did it carry down into the sales force? Number one. Was that part of some of the reason and maybe behind some of the impact you saw with the revenue? And then my part to that question then I have another, but is there any change in the sales strategy with the new head of sales that you brought in? Thank you.

[Andrew Rasdal:]

Well, I think, look, as you can appreciate, we can’t comment on specific employee matters. Certainly, with Todd Wood coming aboard, Todd brings more than 24 years of experience in Allergan, launching novel products to create new treatment categories, including things like Botox, Juvederm and Latisse. So. I’m certainly encouraged, I’m very appreciative of both the former peoples all the work they did to build the strong foundation to put us where we are today and I think, we’re moving forward. In terms of any significant [spray engine] [ph] in the sales strategy, I think, we’re still going to continue to focus on getting new accounts aboard, making sure we choose accounts that don’t just create stocking. But rather will be committed to making the investment in the business like the two accounts that we gave you example of that will drive high levels of utilization and continue to prove out the model. So I think underlying that doesn’t change.

[Ryan Zimmerman:]

Okay, understood. And then just a follow-up, you touched on those two accounts, Andy. But those metrics that you gave and remind me, I think, you said for your Bariatric Surgeon account that was one-year past, it was doing I think 500,000 in practice revenue and on an annualized basis around $2 million, the cost of Aesthetic account was doing, I think, on an annualized basis around $4 million. Is that – correct me if I’m wrong, revenue for the practice or revenue to Obalon?

[Andrew Rasdal:]

Practice revenues. So that would be our estimated based upon the list of revenues to their practice.

[Ryan Zimmerman:]

Understood, okay. Thank you very much for taking the questions.

[Andrew Rasdal:]

Thanks. [Operator Instructions] And our next question comes from Brandon Vazquez with Canaccord Genuity. Your line is open.

[Brandon Vazquez:]

Hi, thanks for taking the question. If I could, I’d like to just go back to guidance real quick. And I was hoping to just get a little bit of what you guys are thinking and what leaves you kind of incrementally more confident here that, I guess, the important thing to meet guidance at this point is getting those starter kit sales to kind of bounce back? So what makes you feel more confident that that can kind of come back in the second-half of the year here or just throughout the remainder of the year to hit full-year guidance? Thanks.

[Andrew Rasdal:]

Well, I think, there are a couple. When we gave guidance said – previously said, we wouldn’t be updating or changing guidance on a quarterly basis unless there was a material event. So I think, it’s a policy that we want to stick with. We said multiple times during the first quarter that we weren’t sure of what the impact of the whole Q4 promotion and New Year’s promotion over Q1 – Q4, Q1 was ultimately, going to be. And so at this time, I don’t – there’s just no change in the policy, no change in guidance. And so we’re maintaining what we’ve provided at the beginning of the year.

[Brandon Vazquez:]

Okay, thanks. And on the other side of the business, I guess, in the reorder sales, which seems to be going really well. I was hoping maybe you could talk a little bit about – in past calls, you’ve talked about kind of closing leads in the funnel of patient leads. And maybe that’s something that’s starting to show in the strong year-over-year growth there and even sequential growth? Are you guys seeing early execution on that or any other initiatives there to help kind of capture more of your patient leads going forward? Thanks.

[Andrew Rasdal:]

Yes, sure, that’s a good question. I think, we – as we said back in Q3 and Q4, we’ve run a number of pilot programs to try and take this just extraordinary patient interest, right, over 400,000 in 2017 and then try to Find-A-Doctor. Again, the biggest reason we believe that we lose people, because we’re only in a limited number by message and there’s not enough people to support accounts to catch all those patients. One of the things that, I think, we’ve gotten more targeted on our ability to generate leads, which are more likely to result in a consultation and then convert in treatment. One of the things that, for instance, we leveraged this – part of this New Year’s resolution program was to utilize a call center for those practices who didn’t have that capability and we made a big leap forward in terms of committing patient interest into consults in the doctor’s office. So yes, I think, we did some things, which were based on pilots, which we scaled a little bit more during the New Year’s promotion and did result. I think, in some more efficiency in the funnel. But obviously, as interest even grew even higher in Q1, we’re going to continue to try to find where those leads are and make it more efficient to be the fastest way to get the most patient treatments.

[Brandon Vazquez:]

Great. Thanks for taking the questions. Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Bill for any closing remarks.

[William Plovanic:]

Great. Thank you for your interest in Obalon, and everybody have a great night.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.