Obalon Therapeutics, Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Feb 2017

[Operator:]

Good day ladies and gentlemen and welcome to the Obalon Therapeutics' fourth quarter and full year 2016 financial results call. At this time all participants are in a listen-only mode and later we will conduct the question-and-answer session and instruction will follow at that time. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to Mr. Bill Plovanic, Chief Financial Officer for Obalon. You may begin.

[William Plovanic:]

Thank you. Good morning and welcome to Obalon Therapeutics' fourth quarter and full year 2016 financial results call. I am Bill Plovanic, Chief Financial Officer for Obalon Therapeutics. With me on today's call is Andy Rasdal, Chief Executive Officer of Obalon. This morning the Company issued a press release detailing financial results for the three months and full year ended December 31, 2016. This can be accessed through the Investor Relations section of the Obalon website and 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 a 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. These forward-looking statements are based on information available to Obalon management as of today and involve risks and uncertainties including those noted in this morning's press release and Obalon's filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. Obalon specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. A telephone replay of the call will be available shortly after completion of this call for seven days. You'll find the dial-in information in today's press release. The archived webcast will be available for one year of the Company's website Obalon.com. For the benefit of those who may be listening to replay or archived webcast, this call was held and recorded on February 23, 2017, 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:]

Thank you, Bill. Good morning everyone. Thank you for joining us today. On this call we will provide some background on our products technology and clinical trial results as well as discuss our very early commercial experience in the United States over the first few weeks of launch. Finally, Bill will review our fourth quarter and full year financial results after which we will answer questions. The Obalon balloon system is a swallowable intragastric balloon system indicated for temporary use to facilitate weight loss in obese adults with a BMI of 30 to 40 for someone that is approximately 3,200 pounds overweight who failed to lose weight through diet and exercise. Our PMA was approved by the FDA on September 8, 2016 and we began commercialization in the United States in January of 2017. The Obalon balloon is the first swallowable gas-filled balloon is intended to occupy space in the stomach to make patients feel full sooner, eat less and lose weight. In addition to the strong safety and efficacy demonstrated in our U.S. Pivotal Trial that supported our FDA approval and which we have experienced in international markets, we believe the Obalon balloon offers many important clinical, economic and ease-of-use advantages over prior and current and gastric balloons. First, by being swallowable, the Obalon balloon is easy to place. A patient simply swallows the capsule with the balloon inside without anesthesia or sedation. Placement does not require complex medical procedure using anesthesia. The simple placement enables balloon volume to be increased gradually over the treatment period by simply swallowing up to two more additional balloon capsules, which is intended to minimize side effects and create progressive weight loss over the full treatment period. Next, by being gas-filled, the balloon is light and floats up in the fundus or top of the stomach, as opposed to sinking to the antrum or bottom of the stomach, like other current and prior gastric balloons. This is intended to be less offensive to increase patient comfort and reduce the adverse events seen with conventional liquid-filled balloons. In April 2016, after we have filed our PMA, we received IDE approval to conduct a single arm clinical study which we named SMARTCAR. While we're waiting approval of our PMA, we enrolled an initial 25 patients at three sites in the U.S. to evaluate a new very capsule technology and a new inflation dispenser. 21 patients met the SMART pivotal trial per protocol requirement of having at least two balloons placed for 18 weeks or more. Those patients had weight loss of 11.3% total bodyweight or 23.2 pounds on average. There were no serious adverse events reported. Given the earlier than expected PMA approval and our focus on commercialization, we did not enroll any additional patients in 2016. However it is likely, we will utilize this open ID to study new products emerging from the R&D pipeline. Although we are only a few weeks into our launch, we are encouraged by initial interest. That said, although we believe it's too early to draw any firm conclusions, I'd like to provide an update on our initial U.S. commercial experience. We received earlier than expected FDA approval in September of last year and begin commercializing in January of 2017. In the fourth quarter of 2016, we hired our direct field force, identified our initial target accounts, and begun laying the foundation for launch including working closely with those accounts to conduct patient information events to begin filling the top of the patient funnel. In late December, we launched our new website and digital presence. In January, we commenced with the first commercial shipments to physicians and placements of balloons and paying patients. We have been successful in attracting all three of our target physician specialties, bariatric surgeons, gastroenterologists and plastic surgeons as initial Obalon customers. Each of these channels brings different capabilities and needs. We remain committed to an initial strategy of staying highly focused to build a strong foundation in a sustainable business in each of these three specialties. In January, we also initiated some initial marketing programs aimed at driving patient flow to our target accounts. These programs have been primarily account driven, such as patient information events. Also in January, we ran a small two-week pilot program of highly targeted digital and radio marketing programs aimed at driving patient interest in attending these account hosted patient events. We are very pleased with the top-level patient interest from that short pilot that generated nearly 2000 patient RSVP leads, some 1,400 clicks from our find a doctor site, and over 300 phone calls from patients to accounts. Of course that activity does not immediately translate to patient treatments. We're working closely with our accounts to develop capabilities and tools to optimize the patient funnel and more efficiently convert patient interest to actual treatments. Earlier in February, the FDA issued a letter to healthcare providers in regards to a potential increase patient risk for the onset of pancreatitis and hyperinflation specific to the use of fluid filled intragastric balloons. The letter from the FDA applies specifically to fluid filled balloons and the lighter Obalon gas-filled balloons. We have never had a case of pancreatitis or hyperinflation causing clinical issues reported with use of the Obalon balloon in almost five years of commercial use outside the U.S. nor in any clinical trial including our U.S. pivotal clinical study in which 981 balloons were placed in 336 patients. We've submitted this information to the FDA in response to their inquiry and also provided additional information and we believe demonstrates that the lighter gas-filled Obalon balloon behaves differently in residence than heavier fluid filled balloons. In order to more closely monitor the safety and efficacy and quality of the Obalon balloon system real time and actual commercial use, we have created an online clinical performance database or registry. All physicians in sites using the Obalon balloon system have access to the registry to enter their patient data and to compare their performance to regional or national data. We will use the knowledge gained from analyzing the data from the registry for scientific publications, for improving clinical practice, for developing new and improved products for commercial purposes, and to provide information to regulatory bodies. We believe this registry is even more important incredibly differentiating the Obalon technology in clinical experience given the recent FDA advisory letter concerning clinical issues of pancreatitis and hyperinflation with traditional fluid-filled balloons. To-date participation in the registry has been very high among our active sites and we have not had a serious adverse event reported since launch. We continue to scale our manufacturing and quality assurance organizations and have had sufficient product supply to meet current demand. More importantly, we've not had a product defect or failure order to date in our U.S. launch. At this time, we are fully obsoleted the earlier generation three-month Obalon balloon and our exclusive manufacturing the six-month Obalon balloon. Internationally, we have received CE Mark approval for the six-month Obalon balloon as well as approval in Brazil and in our key Middle East markets. We intend to launch the six-month balloon only with the new inflation dispenser which will require additional regulatory notifications and approvals. At this time, we're fully focused on our U.S. launch and are assessing the best timing to launch the six-month product into international markets. We will not do so until we have the U.S. on a clear trajectory. In conclusion, although still very early in our U.S. launch, we are encouraged with the interest both providers and patients. We are pleased with the initial clinical product performance in early commercial use. Finally, I'm impressed with the ability of our team to stay focused on executing on the key activities or milestones, we believe will build a strong foundation for sustainable and growing business model. Now I'd like to hand the call over to Bill Plovanic, Obalon's CFO, so that he may review our fourth quarter financial results.

[William Plovanic:]

Thanks Andy. Good morning everyone. Today I'd like to share details of our financial results posted for the fourth quarter and year-ended December 31, 2016. As we have previously stated, while we received U.S. FDA PMA approval in September 2016, we did not commercialize in the U.S. until January 2017. Therefore fourth quarter in 2016 revenues reflect sales of our earlier generation three-month product to our distributor in the Middle East. However we recorded significant costs associated with the preparation for our U.S. launch in the fourth quarter, and therefore we incur those expenses without the benefit of U.S. revenues. Fourth quarter revenue was reported at $772,000 which was down year-over-year from $1 million in the year ago period. The decrease in volume of balloon unit sold was partially offset by an increase in the price per unit. The revenue results reflect our decision to prioritize commercialization efforts for our recently approved six-month treatment product and shipping less of our prior generation product to our international distributor in the Middle East. As of year-end 2016, we completed shipments of our prior generation product to the Middle East. We have discontinued sales of our earlier generation three-month Obalon balloon and expect to transition to our current generation six-month product with our new inflation dispenser for international markets this year. Cost of goods sold of $871,000 increased from $654,000 in Q4'15. Gross profit for the fourth quarter 2016 was a negative $99,000 down from positive $329,000 in the year ago period and a gross margin of negative 13% was below last year's gross margin a positive 33%. The year-over-year reduction in gross profit in margins was primarily attributable to less overhead absorption a result of a decrease in volume manufactured during the period as well as expenses associated with 2016 corporate performance bonus program and the write-down of materials associated with obsolescence of the earlier generation three-month Obalon balloon. R&D expense for the fourth quarter totaled $2.6 million down from $3.8 million in the fourth quarter of 2015. The decrease was primarily attributable to a $1.3 million decrease in clinical trial expenses due to the conclusion of the SMART trial which supported our U.S. PMA submission and approval. The decrease was slightly offset by an increase employee related expenses. SG&A expense for the fourth quarter totaled $4.8 million, up significantly from $1.2 million in the prior year. The increase includes expenses associated with preparing for U.S. commercialization with the most notable being the expansion of our U.S. commercial team, including sales management, the field sales team, marketing personnel and their initial activities. Our U.S. field force including customer service was approximately 25 people as compared to just one in the year ago period. Furthermore, we did not have anybody in marketing in the fourth quarter 2015, but had a full team in place with initial activities to prepare for U.S. commercialization in the fourth quarter of 2016. Operating loss for the fourth quarter was $7.5 million compared to a loss of $4.7 million in the prior year period driven by the lower gross margins previously mentioned and the increased investment in U.S. commercial operations which was somewhat offset by lower R&D expanding due to the conclusion of our U.S. pivotal trial. Interest expense net was $52,000 versus $144,000, warrant liability expenses increased significantly to $84,000 from a gain of $3,000 due to the successful completion of our IPO. GAAP net loss for the quarter was $7.5 million or $0.51 per weighted average common shares outstanding as compared to a GAAP net loss of $4.8 million or $8.42 per share for the prior year period. As of December 31, we had $75.5 million in cash equivalents and short-term investments and $9.9 million in long-term debt. Our top priority for use of cash is to support our U.S. commercialization efforts as well as continued research and development projects. With that my comments on Obalon's fourth quarter and year-ended 2016 financials are complete. We continue to make important commercial progress and believe we're well positioned for U.S. commercialization in 2017 and beyond. We will be participating in the BTIG Investor Conference March 1 and March 2 at Snowbird in Utah. Operator, will you please now open the line for questions.

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from the line of Matt Miksic from UBS.

[Matt Miksic:]

Hey good morning. Thanks for taking our questions. Can you head me, okay?

[William Plovanic:]

Yes. Good morning Matt.

[Matt Miksic:]

Good morning. So I just wanted to maybe get just a little bit of color on what the FDA letter to bed on the fluid-filled balloons. Andy, you mentioned that you've provided the FDA with set information about your clinical performance. Can you maybe just give us a sense of whether that was something that they had reached out to you about leading after this letter and that's kind of behind you or is that something that they continue to look at as part of the group?

[Andrew Rasdal:]

Yeah. Sure. The FDA did inquire of us to confirm that we certainly in any of our clinical trials have not seen any indication of pancreatitis or any hyperinflation created clinical issues. It was pretty too easy to give that data because it's zeros and it's readily available. Also we added on the pretty extensive international experience and so. I think we've all seen a number of these letters in our past lives. I'm not sure I have seen a letter where in the past that the FDA specifically excludes a particular technology and a company like they did with Obalon. The letter is very clear and very specific that this has not been and any of these have been reported with the gas-filled Obalon balloon. So I think with us unless we see something unexpected that were never to occur that's never occurred in the past, I think for Obalon it's behind us, but I don't think the issue of pancreatitis and hyperinflation is over for the fluid-filled balloons for sure.

[Matt Miksic:]

Alright, okay. And then on the sort of P&L and some of your comments Bill if I could just ask one question around your trajectory of spend, you have some continuing, obviously, continuing clinical investments that you're making. You were at a certain level of run rate in terms of your hiring of sales and marketing folks exiting the year. If you could just give us a sense of maybe when the trajectory of spend looks like you're in the first quarter or into '17. Just help us a little bit on our P&L. That would be a great color.

[William Plovanic:]

Sure. Thanks for the question, Matt. I think the way to think about this is as you know we don't provide the full guidance. That said, in terms of just the commercial infrastructure for the most part, we were fully employed at the end of the year. We're always adding a couple or more here and there, but I think for the most part from sales and marketing standpoint, we had our full field force in place in our marketing department.

[Matt Miksic:]

Great. Well, it's early in the launch and that's certainly a fair amount of activity that we're all picking up in the field looking forward to hearing more about it. Bill, I'll hop out of queue here and let some of the other folks ask some questions.

[William Plovanic:]

Great. Thanks Matt.

[Operator:]

Thank you. And our next question comes from the line of Rick Wise from Stifel. You line is open.

[Rick Wise:]

Thank you so much. Good morning, Andy. Good morning, Bill. Let's just sort of pick up on this early in launch. You're couple months into the launch, Andy, you're encouraged by the early interest. Can you give us anymore color on the early experience? I guess first a general question, are these initial weeks meeting, exceeding just your expectations generally in terms of activity in the field, account opening? And maybe just help us understand, is the priority in these initial months account opening or sticking with relatively fewer accounts and trying to build the experience in that account or bugs. Just help us understand how you're focused?

[Andrew Rasdal:]

Yeah. Sure. Well, look I think you just overall as I said, look I'm really impressed with the team, primarily the sales, the marketing and the operations capability, it's a is always easy to say for the first launch of a brand new product which is six-month for us that you're going to hit these milestones and you're going to launch in January, and you're going to open accounts, and I'm please to say that we're doing those things. So I'm pleased with the progress in terms of all the milestones, all the peace, all activities that we're supposed to be doing. We're executing from my perspective on what we said that what we would said that we do. As we've said that all along, our intent is to remain highly and have a highly focused and very deep strategy to focus on fewer accounts and make sure that we understand how to make that a real sustainable revenue model rather than just dropping product and opening a greater variety accounts. We have and we'll continue to maintain the discipline to do that.

[Rick Wise:]

You had last time -- we saw some concrete data, some 30 practices onboard a month or so ago in multiple locations. I mean, again, how do we think, Andy, if I can follow-up on that on the cadence of new account add. I know, I'm not looking for absolute specifics which of course you're not going to -- want to give, but just I mean do we think that from these initial levels they double every six months number of accounts or any kind of aspirational vows about the number of accounts you'd like to have open by the end of this calendar year, any kind of directional long-term even general color on something like that.

[Andrew Rasdal:]

Well, again, I think I realize maybe the answer will disappoint you in specificity, but again we have started out with a finite number of accounts. We will only move on as and when we feel that we have been successful in each account in each territory or accounts in each territory, and then we will continue to grow only when we've proven success and the ability to move on. The only caution I would add and I certainly appreciate that your in-depth research [indiscernible] in all my past life have somebody call every account which is impressive, but just a caution on the find a doc site that when we have a commitment from an account to begin working with us, we put them on that site early, so that they can begin to fill their own funnel with prospective patients which may be in advance of when they are actually able to begin administering treatments. So I just add that caution what you see on the find a doctor site, there may be some like before those people actually we allow them or they are capable of becoming fully active.

[Rick Wise:]

Just one last one from me, can you just update us on pipeline just some of the key products in timelines, I assume everything is roughly on track, but maybe Andy or Bill take us through just remind us some of the key goals for 2017?

[Andrew Rasdal:]

Yeah. Absolutely I think after being rather consumed certainly in the first part of 2016 and even in the second and a happy year with managing through that and achieving earlier and expected the FDA approval of them trying to mobilize some preparation for January launch that we have been able to put increased emphasis back and making sure our pipeline which is full as making progress as we said specifically. Our new capsule technology PMC or the veggie based capsule has been filed as a PMA supplement and we wait our action on that by the FDA. If you look at the 10-K closer, we read name for what we used to call the easy, peasy inflation to be called the touch, and that continuous in as development in both what we've called our navigation which would eliminate the need potentially for x-ray confirmation during placement in the 12-month product are back and making substantial progress from my perspective. I think we will comment as we were in the past only more specifically around truly the new novel technologies only when we have some hard data to support the comments which we may make about those.

[Rick Wise:]

Thank you so Andy.

[Andrew Rasdal:]

Thanks Rick. Welcome.

[Operator:]

Thank you. And our next question comes from the line of Kyle Rose from Canaccord Genuity. Your line is open.

[Kyle Rose:]

Great. Thank you very much for taking the questions. Can you hear me alright?

[Andrew Rasdal:]

Yes. Good morning Kyle.

[William Plovanic:]

Good morning Kyle.

[Kyle Rose:]

Good morning. So I just wanted -- I understand you're not going to give specifics on the cadence or some the account adds, but on the initial diligence we've done, we're pretty impressed with the account opening specifically with the plastic surgeons and more towards the aesthetic side of the market, and I think that's one of the big thesis point of your business plan as far as expanding the market away from the historical weight loss. Just wanted to see if you can talk about the early market traction you've gotten in some of the maybe the non-core obesity users and just how receptive they are as far as adopting these new technologies?

[Andrew Rasdal:]

Yeah. Sure. I mean I think we've always stated that we think the aesthetic channel offers a very interesting experience and it has a lot of synergies. And I think it really has been opened to Obalon just because of the nature of our product and ease-of-use both in terms of placement and then the management of patients over the course of the treatment especially through the first few weeks and the strong safety profile. So I think we were candidly a bit surprised by the degree of interest from the aesthetic channel and including plastic surgeons, certainly from a clinical logistic standpoint, they are the group that has to make the most change in terms of having a capability to place to manage patients and to do the removals. They are incredibly robust, creative, and thoughtful businesspeople as well as obviously very, very skilled clinicians. So from a product clinical safety standpoint very impressed for sure, everyone that we've talked to have placed patient safety at the top of the pyramid which is nice. And then I think in terms of their business practices, they certainly know how to go after and to get patients. And I think as we continue to refine how to best implement a clinical logistics with them I would hope you would see an acceleration within that, but we're certainly pleased maybe a little bit surprised by the strength of their interest and in something that as we continue to learn, I'm hopeful will be a strong and important channel for patients, for people who are obese to view another channel where they can go be treated with a minimally interventional technology.

[Kyle Rose:]

That's great. I appreciate the additional color there. And then just one last question, I know that you're not give specifics, but just in our experience in some other industries, new and differentiated technologies are launching, you get the early adopters and then their initial product then tested on patients for a little bit and do some follow-up before reorder, so just as we're, I guess, just six, seven weeks in the launch in the U.S., can you just talk about what the ordering and some of the reordering patterns are from some of early users, and then just you know how we should expect that as the Company grows and add new accounts over the course of '17.

[Andrew Rasdal:]

Look with really just a few weeks into the launch day, there is no way we can comment intelligently on re-or patterns or those things at this time. I understand the caution we've entered. This is a group that's introduced a lot of new novel products to brand new markets. I think the thing that's a little bit different about this and may overcome some of the folks let's do a few and wait-and-see is of course the number of these accounts have prior experience with one of the two other commercially available balloons, so they know about being in the balloon business. The biggest advantage we offer right out the gate is ease of placement without a complex procedure and then a very different adverse event and patient discomfort profile and so those things don't take you know weeks or months to figure out they take hours and days to see that the promise of that is true and then I think there are in business and then weight loss occurs progressively. You add that to very strong data especially on the safety front right from our pivotal trial of the 0.3% SAD rate, and then the statistical weight loss. I can't say that people won't do some patients and then wait to look, but I think initially we're encouraged by the experience of these centers, they will continue to make investment and progress along the way.

[Kyle Rose:]

Thank you very much for taking the questions.

[Andrew Rasdal:]

Thanks Kyle.

[Operator:]

Thank you. [Operator Instructions]. And your next question comes from the line of Sean Lavin from BTIG. Your line is open.

[Unidentified Analyst:]

Great. This is actually Ryan on for Sean. Can you hear me?

[Andrew Rasdal:]

Hey Ryan. Good morning, Ryan.

[William Plovanic:]

Good morning Ryan.

[Unidentified Analyst:]

Good morning. So a lot of questions have really been asked. And then just on your inventory levels are picking up as expected. And just wanted to get your thoughts where you are at from an inventory standpoint in terms of your capacity as demand picks up? And then subsequent to that how we should think about the gross margin ramp up on commercialization? Any color would be helpful.

[William Plovanic:]

Yeah. I think obviously as you'd expect in the fourth quarter we started building inventory for the commercial launch in January. Today we believe we have capacity in place to meet our current demand and we continue to manufacture good quality product and are very pleased with what we're seeing thus far. In terms of gross margins going forward, as we build capacity and build infrastructure, we stated that gross margins, our costs will move up and down, over time we would expect gross margins improve as a percentage of revenues, but in the interim there's going to be some volatility in that line.

[Unidentified Analyst:]

Okay, great, that very helpful. And then just thinking about you've filled out the sales rep -- your sales team in the early half or the back half of this year. Just curious if you're still thinking about your sales rep ramp in the same manner as you were before in terms of maybe batch and you're hiring closer to the back half of the year in '17 or if you're thinking about it differently based on your initial results in more of a progressive manner in terms of bringing on new reps as you start to commercialize.

[Andrew Rasdal:]

Look, Ryan, the strength of a small and nimble organization like ourselves is that we can respond to changes quickly and to go forward, I think we demonstrated when the sales leadership team was put together and then hired full complementary account executive managers, product specialists, and customer service within just a few months without the use of any recruiter. So I think the technology like this is new and there is always interest of sales, people who would like to join and so, if either strategically or it makes sense to add sooner, I think we'll be in a position to do that incrementally. That being said, right now by taking this very focused and deep strategy, I'm comparable that our current field organization has planted the additional capacity for the foreseeable future.

[Unidentified Analyst:]

Okay, great. Thanks for taking the question guys and look forward to the early commercialization.

[Andrew Rasdal:]

Thanks.

[William Plovanic:]

Thank you.

[Operator:]

Thank you. And at this time, I'm showing no further questions.

[William Plovanic:]

Great. Thank you. We thank you for participating in today's conference call. Have a good day.

[Andrew Rasdal:]

Bye-bye.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a great day.